ELY  AND   WIC 


ELEMENTAKY   PEINCIPLES 
OF   ECONOMICS 


ELEMENTARY  PRINCIPLES 
OF  ECONOMICS 

TOGETHER  WITH  A  SHORT  SKETCH 
OF  ECONOMIC  HISTORY 


BY 

RICHARD  T.   ELY,  Pn.D.,LL.D. 

PROFESSOR  OK   POLITICAL   ECONOMY  IN  THE  UNIVEE8ITY   OF  WISCONSIN 

AND 

GEORGE   RAY   WICKER,   PH.D. 

ASSISTANT    PROFESSOR  OP  ECONOMICS  IN  DARTMOUTH   COLLEGE 


Nefo  If  orfc 
THE   MACMILLAN   COMPANY 

LONDON:  MACMILLAN  &  CO.,  LTD. 

1909 

All  rightt  reaervtd 


COPYRIGHT,  1904, 
BY  THE  MACMILLAN  COMPANY. 


S«t  up  and  electrotypcd.  Published  May,  1904.  Reprinted 
November,  1904;  July,  1905;  September,  1906;  January,  July, 
September,  1907  ;  January,  1908  ;  July,  1909. 


PREFACE 

IN  offering  this  text-book  to  teachers  and  students  of 
economics,  the  authors  feel  that  a  brief  word  of  explana- 
tion and  suggestion  may  afford  help  in  judging  the  quality 
of  the  book  as  well  as  in  the  use  of  the  book,  should 
favoring  judgment  result  in  its  adoption  for  class-room 
work. 

It  has  been  the  aim  of  the  authors  first  of  all  to  make 
the  book  teachable.  In  choice  and  rejection  of  substan- 
tive and  illustrative  material  and  in  its  arrangement ;  in 
the  form  of  the  chapters,  paragraphs,  sentences,  and 
words;  in  all  that  can  affect  the  ease  or  difficulty  of 
conveying  an  understanding  of  economics  to  the  beginner, 
this  complicated  quality  of  teachableness  has  been  ear- 
nestly and  constantly  sought. 

Fortunately  for  the  welfare  of  the  science  of  economics, 
there  is  more  or  less  disagreement  among  economists  as 
to  many  points  of  theory.  But  manifestly  an  elementary 
text-book  on  the  subject  is  not  a  place  in  which  conflict- 
ing views  should  be  presented  and  discussed,  even  if  space 
would  permit.  Nor  have  the  authors  wished  to  use  the 
pages  of  the  book  for  the  propagation  of  views  in  which 
they  might  chance  to  differ  from  other  economists.  It 


2056185 


VI 


PREFACE 


has  seemed  best  to  regard  constantly  the  purpose  of  the 
book  as  a  text,  and  hence  to  subordinate  individual  opin- 
ion to  the  general  good  of  the  student.  Here,  as  in  many 
another  question  of  choice,  Pope's  rule  may  well  apply :  — 

"  Be  not  the  first  by  whom  the  new  is  tried, 
Nor  yet  the  last  to  lay  the  old  aside." 

In  the  main,  therefore,  and  so  far  as  the  authors  have 
been  able,  they  have  presented  the  outlines  of  theory  in 
the  form  in  which  they  are  to-day  most  generally  accepted 
by  economists,  leaving  for  later  and  advanced  study  the 
conflicting  assumptions  and  arguments  and  points  of  view 
of  economists  who  may  be  paving  the  way  for  the  most 
acceptable  text-book  of  a  coming  decade. 

An  examination  of  the  book  will  show  that  scattered 
passages,  amounting  in  the  aggregate  to  many  pages, 
have  been  printed  "solid,"  i.e.  without  the  interlinear 
spaces  regularly  used.  Such  are  the  passages  which, 
either  from  their  greater  difficulty  or  from  their  subsidi- 
ary character,  may  best  be  omitted  by  a  teacher  pressed 
for  time.  Moreover,  for  classes  in  which  the  time  limits 
are  too  narrow  to  permit  careful  study  of  the  whole  text, 
it  may  be  found  expedient  to  omit  Book  IV,  on  Public 
Finance. 

It  is  perhaps  unnecessary  to  add  the  word  of  caution 
that  the  summaries  and  questions  at  the  close  of  the  chap- 
ters may  easily  become  a  hindrance  rather  than  a  help  to 
real  thought  and  study  if  the  teacher  permit  himself  or 


PBEFA  CE  yii 

his  class  to  fall  into  slavish  reliance  upon  them.  Like 
the  references  to  collateral  reading,  the  questions  and 
summaries  are  to  be  used  as  starting-points  and  guides 
to  further  study  and  discussion. 

It  has  been  the  hope  of  the  authors,  moreover,  that  the 
material  carefully  elaborated  in  the  appendixes  may  not 
only  help  to  guide  both  teacher  and  class  during  the 
period  of  the  formal  study  of  the  book,  but  may  also 
encourage  and  direct  the  student  in  the  after  days  of 
his  professional  or  business  or  political  life. 

RICHARD  T.  ELY. 
GEORGE  RAY  WICKER. 


CONTENTS 
BOOK  I 

• 

INTRODUCTORY 

CHAPTER  PAQB 

I.     Preliminary  Remarks  on  the  Nature  of  Economics    .        .  1 

II.     The  Principal  Divisions  of  Economics         ....  5 
III.     Fundamental  Institutions  in  the  Existing  Socio-economic 

Order 9 

BOOK   II 
A  BRIEF  SKETCH  OF  ECONOMIC  HISTORY 

I.  Introductory 19 

II.  Early  Stages  of  Industrial  Development     ....  26 

III.  The  Industrial  Stage  in  England 42 

IV.  The  Industrial  Stage  in  the  United  States  ....  67 

BOOK  III 
ECONOMIC  THEORY 

PART  I 
CONSUMPTION 

I.  Introductory :  Utilities  and  Goods      .        ....  80 

II.  The  Law  of  Diminishing  Utility 87 

III.  Demand        .        .        .        . 92 

IV.  The  Economy  of  Spending  and  Saving       ....  103 


CONTENTS 

PART  II 

PRODUCTION 


OHAPTn 


MM 


I.  Introductory         •        •        •        •        .....  113 

II.  The  Factors  of  Production  .       ','•'"'  .....  123 
ITT.    The  Organization  of  Production  ......  141 

PART   III 

TEANSFERS  OF  GOODS 

(Exchange) 

L    Introductory         .........  161 

H.    Value    ...........  165 

III.  Monopolies  and  Monopoly  Value         .....  177 

IV.  Money  ...........  194 

V.    Credit  and  Banking      ........  217 

VI.    International  Trade     ........  230 

PART  IV 

DISTRIBUTION 

I.  Introductory         .........  246 

II.  Rent     ...........  252 

III.  Wages  and  the  Labor  Problem    ......  267 

IV.  Interest         ..........  290 

V.    Profits  ...........  302 

VI.    Socialism      ..........  312 

BOOK  IV 
PUBLIC  FINANCE 

I.    Expenditure  and  Revenue    .......  327 

II.  Revenues  in  the  United  States                                               ,  346 


CONTENTS  xi 

APPENDIX  I 


PAGB 


Subjects  for  Essays,  Discussions,  and  Debates     ....  365 

APPENDIX  II 

Courses  of  Reading 371 

INDEX    ..•••• 383 


BOOK  I 

INTRODUCTORY 

CHAPTER  I 
PRELIMINARY  REMARKS  ON  THE  NATURE  OF  ECONOMICS 

ALTHOUGH  the  whole  bodk  which  follows  is  but  an 
expanded  definition  of  economics,  the  student  who  is 
about  to  enter  upon  a  study  of  the  subject  may  well  wish 
to  have  explained  to  him  in  advance,  at  least  in  rough 
outlines,  what  is  the  field  into  which  he  is  about  to  enter. 
At  the  outset,  therefore,  let  us  attempt  to  frame  some 
idea  of  the  nature  of  the  science  and  of  the  group  of 
sciences  with  which  it  is  most  closely  connected.  Later, 
we  can  return  to  the  subject,  and,  by  summarizing  the 
results  of  our  study,  arrive  at  a  more  complete  defini- 
tion. 

The  Place  of  Economics  among  the  Social  Sciences.  — 
First  of  all,  economics  is  a  social  science.  That  is,  it 
deals  with  man  in  his  relation  to  society.  But  there  are 
other  social  sciences  besides  that  which  we  are  about  to 
study,  among  which  may  be  mentioned  political  science 
and  sociology. 

The  question  therefore  naturally  arises,  How  is  our 
science  distinguished  from  the  others?  To  answer  this 
question,  we  must  consider  more  closely  the  different 
aspects  under  which  society  may  be  viewed.  From  the 


2  ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

first,  men  in  society  have  been  busy  in  various  lines  of 
effort,  which  for  convenience  we  may  group  as  follows  : 
language,  art,  education,  religion,  family  life,  social  life,  — 
in  the  narrow  sense  of  that  term,1  —  political  life,  and  eco- 
nomic life.  It  is  with  the  last  of  these  eight  spheres  of 
human  activity  that  our  science  has  to  deal.  By  the  term 
"economic  life"  is  meant,  roughly  speaking,  that  part  of 
human  activity  which  is  devoted  to  getting  a  living. 

A  peculiar  feature  of  these  activities  is  that  they  are  all 
collective;  that  is,  they  are  activities  which  one  man  can- 
not well  carry  on  alone.  In  the  case  of  family  and  politi- 
cal life  and  some  of  the  others  this  is  at  once  obvious. 
Careful  examination  shows  it  to  be  true  of  them  all.  It  is 
for  this  reason  that  the  sciences  which  deal  with  them  are 
called  social  sciences. 

Preliminary  Definition  of  Economics.  —  Economics,  then, 
is  the  science  which  treats  of  those  social  phenomena  that  are 
due  to  the  wealth-getting  and  wealth-using  activities  of  man. 
It  deals  with  all  those  facts  about  society  that  result  from 
man's  effort  to  get  a  living.  The  wealth-getting  activity 
itself  we  call  economic  activity.  The  economic  life,  or  the 
relations  to  which  the  economic  activity  gives  rise,  we  may 
call  by  the  simple  word  "  economy."  With  this  understand- 
ing, we  may  say  that  economics  is  the  social  science  which 
deals  with  the  economic  life,  or  the  economy,  of  man. 

The  Economic  Unit. — If  we  keep  in  mind  this  meaning  of 
the  term  "  economy,"  we  shall  see  that  there  are  economies 
of  various  sorts.  Thus,  the  economy  of  the  ancient  Greek 
household  with  its  slaves  and  dependents  is  different  from 

1  We  mean  what  would  popularly  be  designated  as  social  intercourse,  — 
giving  and  receiving  calls,  conversation,  etc.  When  we  speak  of  going 
into  society,  we  generally  employ  the  word  in  this  narrow  sense. 


REMARKS  ON  THE  NATURE  OF  ECONOMICS  3 

that  of  the  mediaeval  city  or  of  the  modern  nation.  In 
this  book  we  study  the  economy  of  the  nation  as  a  unit, 
with  individual,  household,  city,  and  state  (in  the  narrow 
sense)  as  subordinate  economies.  We  are  coming,  how- 
ever, to  regard  the  whole  world  as  an  economic  unit. 

The  eight  different  human  activities  which  have  been 
enumerated  cannot  be  entirely  separated  in  thought  any 
more  than  they  are  actually  separate  in  real  life.  Thus 
legislation,  though  it  belongs  primarily  to  the  province  of 
political  science,  has  an  intimate  bearing  on  economic  life. 
Again,  industry  in  Russia  is  seriously  hampered  by  the 
frequent  recurrence  of  saints'  days,  which  have  therefore 
great  economic  importance  ;  but  these  have  primarily  to 
do  with  religion,  not  with  economics.  In  the  same  way, 
economic  life  is  dependent  upon  all  the  other  groups  of 
human  activity. 

Final  Definition  of  Economics.  —  It  is  evident,  then,  that 
a  complete  definition  of  economics  must  be  made  broad 
enough  to  take  note  of  this  fact.  We  may  sum  up  all  these 
considerations  in  a  final  definition,  as  follows  :  Economics 
is  the  science  (1)  which  treats  of  those  social  phenomena  that 
are  due  to  the  wealth-getting  and  wealth-using  activities  of 
man;  and  which  (2)  deals  with  all  other  phases  of  his  life  in 
so  far  as  they  affect  his  social  activity  in  this  respect. 

SUMMARY 

1.  Economics  is  a  social  science. 

2.  Each  great  department  of  social  life  has  its  appropriate  science. 

3.  Economics  is  the  branch  of  social  science  that  deals  with  the 

phenomena  to  which  the  wealth-getting  and  wealth-using  ac- 
tivities of  men  give  rise. 

4.  Economics  deals  also  with  all  the  other  social  phenomena  in  so  far 

as  they  affect  economic  activity. 


ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


QUESTIONS 

1.  Into  what  different  groups  may  man's  social  activities  be  divided  ? 

2.  With  which  group  does  economics  primarily  deal?    What  con- 

cern has  it  with  the  others  ? 

3.  What  have  the  different  groups  in  common? 

4.  What  is  economics  ? 


CHAPTER  II 
THE  PRINCIPAL  DIVISIONS  OF  ECONOMICS 

ECONOMICS  is  a  science  which  covers  so  wide  a  field 
that  it  has  been  found  desirable  to  divide  it  into  parts, 
each  of  which  is  often  treated  by  writers  in  separate  works 
or  in  separate  volumes  of  the  same  work.  It  may  help 
the  student  to  have  outlined  for  him,  in  advance,  the 
divisions  as  they  will  be  presented  in  this  work. 

First  of  all,  it  has  been  deemed  well  to  present  to  the  stu- 
dent in  the  opening  chapter  an  idea  of  what  the  science  is, 
and  to  show  him,  as  is  being  done  in  the  present  chapter, 
what  are  the  main  topics  with  which  the  science  is  con- 
cerned. In  another  introductory  chapter  there  is  pre- 
sented a  discussion  of  some  of  the  fundamental  institutions 
in  our  social  order. 

In  the  second  place,  it  is  thought  advisable  to  give  in  a 
few  chapters  a  skeleton  outline  of  the  economic  history  of 
mankind,  with  more  particular  attention  to  those  late 
developments  in  English  and  American  economic  history 
which  have  given  rise  to  existing  economic  conditions. 
This  part  of  the  subject  is  often  omitted  from  elementary 
text-books,  and  therefore  a  word  of  explanation  is  here  in 
place. 

Few  students  undertake  the  study  of  economics  with- 
out having  pursued  courses  in  history;  but  the  histories 
usually  studied  in  schools  are  devoted  in  great  part  to 

6 


6  ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

other  than  economic  considerations,  and  are  written  from 
another  viewpoint  than  that  which  should  be  ours  in 
our  present  study.  It  is  of  the  utmost  importance  that 
the  student  should  approach  the  study  of  present  economic 
conditions  with  the  historical  spirit.  As  the  chapters  in 
economic  history  will  show,  social  and  economic  institu- 
tions are  not  permanent,  but  constantly  changing ;  and  to 
understand  aright  what  is,  we  must  know  whence  it  has 
developed,  and,  so  far  as  we  can,  whither  it  is  tending. 
Moreover,  the  study  of  economic  history  should  show  the 
student,  as  perhaps  nothing  else  can,  that  great  changes 
in  the  economic  condition  of  a  nation  or  a  class  do  not 
come  about  in  a  moment  at  the  command  of  an  individual 
or  of  a  great  number  of  men  organized  in  a  state,  though 
the  action  of  the  individual  and  of  the  state  are  powerful 
forces. 

The  way  will  thus  be  made  clear  for  that  which  is  more 
commonly  presented  in  text-books  under  the  name  of  eco- 
nomics or  political  economy.  An  analysis  of  economic 
phenomena  at  any  time  shows  that  these  may  be  divided 
for  purposes  of  clearer  study  into  four  main  parts  :  first, 
those  connected  with  man's  consumption  of  goods,  or,  in 
other  words,  with  the  satisfaction  of  his  wants  ;  second, 
those  connected  with  the  production  of  goods  ;  third,  those 
connected  with  the  exchange  or  transfer  of  goods  among 
men  ;  and  fourth,  those  connected  with  the  distribution  of 
the  income  of  society  among  the  individuals,  classes,  and 
factors  of  production  which  cooperate  to  create  that  in- 
come. By  dividing  thus  the  general  subject  of  economic 
theory,  we  are  enabled  to  look  at  man's  economic  life  from 
four  points  of  view.  The  four  divisions  which  we  have 
indicated  are  usually  treated  under  the  following  head- 


THE  PRINCIPAL  DIVISIONS   OF  ECONOMICS  1 

ings  :  consumption,  production,  transfers  or  exchange,  and 
distribution.  Following  the  practice  of  several  recent 
writers,  we  shall  discuss  them  in  the  order  given. 

Certain  socio-economic  problems  of  great  present  in- 
terest will,  on  account  of  their  special  importance,  be 
treated  at  considerable  length  in  those  divisions  of  the 
general  subject  to  which  they  have  a  logical  relation. 
Thus,  under  the  head  of  transfers  or  exchange,  we  shall 
discuss  the  subjects  of  monopolies,  bimetallism,  and  pro- 
tective tariffs,  and  under  the  head  of  distribution,  many 
of  the  practical  problems  concerning  labor  and  wages. 

Finally,  the  financial  relations  and  operations  of  govern- 
ment, national,  state,  and  local,  are  of  a  nature  so  impor- 
tant to  the  welfare  of  the  citizen,  and  in  some  respects  so 
peculiar,  that  it  is  thought  well  to  treat  them  separately 
in  chapters  devoted  to  the  subject  of  public  finance. 

SUMMARY 

1.  For  convenience  of  treatment,  economics  is  usually  divided  into 

several  different  fields  of  study. 

2.  The  present  book  begins  with  an   introduction  explaining  the 

nature  and  scope  of  the  science. 

3.  A  sketch  of  economic  history  is  given  to  prepare  the  student  for  a 

better  understanding  of  present  conditions  and  problems. 

4.  Economic  theory  is  presented  under  the  four  general  headings : 

consumption,  production,  transfers  (or  exchange),  and  distri- 
bution. 

5.  A  short  presentation  of  the  subject  of  public  finance  is  added  to 

give  the  student  a  more  complete  idea  of  the  nature  of  eco- 
nomics. 

QUESTIONS 

1.  What  subjects  are  discussed  in  the  introductory  chapters  of  this 

book? 

2.  Why  is  it  thought  well  to  include  economic  history  ? 


8  ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

3.  What  are  the  usual  main  divisions  of  economic  theory  ?    In  what 

order  are  they  given  in  this  book  ? 

4.  Of  what  does  public  finance  treat?    Why  is  it  included  in  this 

book? 

LITERATURE 

A  comparative  study  of  general  treatises  with  the  object  of  noting 
differences  in  the  order  of  treatment  will  be  found  of  service  in 
fixing  in  the  student's  mind  the  nature  and  scope  of  economics. 


CHAPTER  III 

FUNDAMENTAL  INSTITUTIONS  IN  THE  EXISTING  SOCIO- 
ECONOMIC  ORDER 

IN  every  civilized  State  to-day  there  are  certain  condi- 
tions under  which  men  perform  their  economic  activities, 
but  which  are  so  fundamental  in  their  nature  that  we  do 
not  often  stop  to  consider  them.  So  deep  lying  are  they 
and  so  long  established  that  we  easily  fall  into  the  error 
of  thinking  of  them  as  necessary  to  the  very  existence  of 
society  under  all  conceivable  circumstances.  Yet  careful 
consideration  will  convince  the  student  that  this  is  far 
from  the  case.  Let  us,  then,  consider  in  detail  some  of 
the  more  important  of  these  fundamentals. 

I.   PRIVATE  PROPERTY 

The  right  of  private  property,  for  instance,  is  so  funda- 
mental in  our  modern  civilization  that  we  hardly  think  of 
it  as  a  creation  of  society,  maintained  only  by  constant 
vigilance  on  the  part  of  the  State,  and  subject  even  now  to 
slow  and  gradual  modification.  Still  less,  perhaps,  has  it 
ever  occurred  to  most  of  us  as  a  right  that  is  open  to  ques- 
tion. The  reason  for  this  attitude  of  mind  is  that  people 
are  ruled  in  great  measure  by  custom  rather  than  by 
the  light  of  history  and  of  reason.  When  any  customary 
right  has  spread  very  widely  and  become  deeply  rooted 
in  society,  men  fall  into  the  error  of  calling  it  a  "  natural 

9 


10          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

right."  By  this  term  they  usually  mean  that  the  right  is 
"established  by  nature,"  and  hence  not  to  be  called  in 
question.  But  in  reality  there  are  no  such  rights.  All 
true  rights  are  rational — rights  which  can  show  good 
reason  for  their  claims,  and  can  justify  their  existence  on 
the  ground  that  they  promote  human  welfare. 

Yet  it  must  be  noted  that  the  very  fact  of  the  long-con- 
tinued existence  of  any  social  institution  furnishes  strong 
presumptive  evidence  that  the  institution  has  ministered 
to  social  welfare.  Therefore  those  who  appeal  to  the  law 
or  to  public  opinion  to  overthrow  or  to  abate  the  force  of 
the  institution  have  to  bear  the  burden  either  of  showing 
that  social  conditions  have  so  changed  as  to  destroy  the 
beneficent  operation  of  the  institution,  or  of  offering  very 
strong  evidence  that  some  other  institution  would  better 
subserve  the  end. 

Beginning  of  the  Right  of  Private  Property.  —  On  look- 
ing into  the  history  of  private  property,  we  find  in  the 
first  place  that  it  has  not  always  existed  among  men.  The 
savage  at  first  owned  nothing.  Doubtless,  even  in  very 
early  times,  when  the  primitive  man  had  caught  or  killed 
an  animal,  he  considered  it  more  or  less  his,  though  even 
in  such  cases  it  was  the  common  property  of  his  family 
or  tribe  rather  than  the  exclusive  property  of  the  individ- 
ual. From  insignificant  beginnings,  the  right  or  feeling  of 
ownership  has  grown,  including  more  and  more  things 
and  dividing  the  ownership  more  and  more,  until  at  last 
nearly  everything  is  owned  and  nearly  every  one  owns 
something.  Not  until  a  rather  advanced  stage  of  civiliza- 
tion had  been  reached  did  land  become  property,  and  even 
to-day  the  last  forms  of  tribal  ownership  of  land  have  not 
everywhere  given  place  to  individual  property. 


THE  EXISTING   SOCIO-ECONOMIC  ORDER  11 

Strengthening  of  the  Right.  —  In  the  second  place,  it  is 
only  in  comparatively  recent  times  that  private  ownership 
has  been  either  so  exclusive  or  so  extensive  as  it  is  at 
present.  It  is  not  many  centuries  since  a  Scottish  clan 
held  the  right  to  the  territory  it  occupied  so  absolutely 
that  no  chieftain,  however  powerful,  could  abridge  the 
right.  To-day,  there  are  beautiful  tracts  of  country  in 
Scotland  which  have  been  almost  stripped  of  their  agri- 
cultural population  because  the  owners,  descendants  of  the 
old  chieftains,  have  preferred  that  game  rather  than  men 
should  get  a  living  on  their  estates.  Slowly,  however,  a 
reaction  has  set  in,  and  most  nations  are  now  beginning  to 
extend  their  public  claim  to  game  and  fish,  and  are  refus- 
ing to  allow  so  absolute  a  right  of  private  property. 

Limitations  to  the  Right.  —  In  the  third  place,  we  find 
that  even  to-day  private  property  has  certain  sharp  limi- 
tations which  indicate  whence  it  springs  and  from  what 
source  it  draws  its  being.  The  State,  representing  the 
people,  even  now  says  to  the  individual  citizen,  "  Thus  far 
shalt  thou  go,  and  no  farther."  By  its  action  it  shows 
that  it  is  the  grantor  of  private  rights,  and  that  it  may 
withdraw  them  whenever  such  a  course  will  be  to  its  ad- 
vantage. Let  us  consider  some  of  these  limitations. 

Limitations  to  Private  Property  imposed  by  the  State  in 
its  Own  Behalf.  —  1.  Taxation.  The  first  of  these  limita- 
tions exists  in  the  taxation  of  private  property,  which 
from  one  point  of  view  may  be  regarded  as  simply  the 
taking  by  the  State  for  its  own  uses  of  a  part  of  what  it  has 
left  to  the  private  ownership  of  its  citizens.  Taxation,  as 
understood  to-day,  is  a  comparatively  recent  activity  of  the 
State.  During  the  Middle  Ages  the  right  of  the  State  to 
take  private  property  for  its  support  was  stoutly  opposed, 


12         ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

and  there  was  a  strong  tendency  to  regard  all  taxation 
as  extortion.  To-day  the  right  of  taxation  is  almost  uni- 
versally conceded.  Taxation  is  the  most  extreme  limita- 
tion imposed  upon  the  right  of  private  property  by  the 
State  in  its  own  behalf. 

2.  Eminent  Domain  and  Requisition.  —  A  second  limita- 
tion exists  in  the  right  of  the  State  to  appropriate  to  itself 
specific  pieces  of  property  with  direct  compensation  to  the 
private  owner.     This  right  is  exercised  especially  in  time 
of  war,  as  when  the  nation  for  its  military  needs  takes 
cattle  for  the  subsistence  of  its  troops  or  wagons  for  their 
transportation.     Such  an  assumption  of  proprietorship  is 
known  as  requisition.     But  in  times  of  peace  the  govern- 
ment often  takes  for  its  own  purposes,  with  due   com- 
pensation, land  or  other  property,  under  the  exercise  of 
what  is  known  as  the  right  of  eminent  domain,  —  words 
which  in  more  common  language  simply  mean  ultimate 
ownership. 

3.  Fines,  Forfeits,  and  Escheats.  —  Fines,  imposed  and 
collected  by  government  under  the  exercise  of  its  police 
power,  form  a  third  clear  limitation  upon  the  absoluteness 
of  private  property.     This  limitation  and  others  closely 
connected  with  it,  such  as  forfeits  and  escheats,  call  for 
no  explanation  here. 

Limitations  directly  in  Behalf  of  Individuals.  — The  three 
limitations  just  described  are  such  as  the  State  sets  up 
directly  in  its  own  behalf.  But  there  are  still  others, 
enforced  by  the  State  not  directly  for  itself  but  for  indi- 
vidual citizens.  (1)  The  first  is  the  exercise  of  the  right 
of  eminent  domain  in  behalf  of  individuals  or  corporations. 
If  a  regularly  chartered  railway  company  is  unable  to 
make  terms  directly  with  the  owner  of  land  over  which 


THE  EXISTING  SOCIO-ECONOMIC  ORDER  13 

it  proposes  to  lay  its  tracks,  it  can  secure  possession  by 
appealing  to  the  government,  which  compels  transfer  of 
the  property  for  compensation.  It  should  be  noticed, 
however,  that  in  all  such  cases  it  is  presumed  that  a  public 
purpose  is  to  be  subserved  by  the  company. 

Moreover,  there  is  a  vast  system  of  limitations  upon  the 
use,  or  rather  the  abuse,  of  private  property,  which  are 
designed  to  prevent  the  individual  from  injuring  him- 
self or  others.  We  need  not  enter  into  an  extended 
description  of  these  limitations.  Generally  speaking, 
(2)  no  man  may  use  private  property  to  maintain  a  public 
nuisance.  Nothing  is  more  fallacious  than  the  idea  that 
the  right  of  ownership  allows  a  person  to  do  as  he  pleases 
with  his  property.  It  is  true  that  rights  of  private  prop- 
erty have  sometimes  been  so  denned  as  to  permit  many 
abuses  to  go  unpunished,  but  it  has  been  the  tendency 
of  the  State  so  to  limit  the  rights  as  to  exclude  abuses. 
Whenever  any  given  right  has  proved  generally  unfavor- 
able to  the  welfare  of  society,  government  has  modified 
or  abolished  that  right,  or,  failing  to  do  so,  has  endan- 
gered its  own  stability. 

II.   GUARANTEED  PRIVILEGES 

Closely  connected  with  the  general  subject  of  property 
is  the  legal  arrangement  whereby  exclusive  privileges  are 
awarded  in  return  for  services  to  society.  Such  privileges 
really  become  a  special  form  of  private  property,  and  have 
particular  importance  in  determining  the  distribution  of 
wealth,  although  they  are  not  without  importance  also  in 
the  production  of  wealth,  on  account  of  the  stimulus  which 
the  hope  of  such  privileges  may  give  to  invention  and 
improvement. 


14          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Under  this  head  come  trade-marks,  copyrights,  and  pat- 
ents. The  laws  regulating  trade-marks  give  property  in  the 
design  which  characterizes  some  particular  product.  In 
the  case  of  copyrights  and  patents,  authors  and  inventors 
are  granted  exclusive  rights  in  their  productions  for  a 
limited  period. 

Most  modern  States  proceed  on  the  assumption  that 
the  public  interest  will  be  furthered  by  granting  these 
exclusive  privileges,  and  on  the  whole,  the  policy  has 
probably  been  justified  by  its  results.  Yet  experience 
has  shown  that  neither  patents  nor  copyrights  should  be 
given  without  limitations.  Patents  should  not  be  given 
on  light  and  trivial  grounds,  nor  for  unlimited  or  over- 
long  periods.  Moreover,  owners  of  patents  should  be 
made  by  law  either  to  use  them  or  to  allow  them  to  lapse, 
and  to  grant  to  others  the  right  to  use  them  on  payment 
of  a  reasonable  royalty.  Similarly,  copyrights  are  care- 
fully guarded  in  the  interests  of  the  public.  The  law  in 
a  general  way  aims  to  give  the  reward  of  services  to  the 
author,  and  avoids  allowing  a  reward  for  services  which 
others  have  performed. 

III.   CONTRACT 

Another  fundamental  institution  in  our  present  indus- 
trial society  is  contract.  Some  sort  of  contract  lies  at 
the  basis  of  all  associated  action.  That  this  condition  of 
associated  activity  should  be  maintained  by  the  State  can 
hardly  be  doubted,  yet  even  the  right  to  contract  has  its 
limitations  resting  upon  human  well-being.  To-day  legis- 
lation provides  (1)  who  may  and  who  may  not  contract, 

(2)  for  what  purposes  valid  contracts  may  be  made,  and 

(3)  under  what  forms  and  conditions  they  must  be  made 


THE  EXISTING   SOCIO-ECONOMIC  ORDER  15 

to  be  valid.  Experience  justifies  this  regulation.  Chil- 
dren, for  example,  cannot  as  a  rule  make  contracts  that 
will  bind  themselves,  because  they  are  not  presumed  by 
the  law  to  have  the  requisite  knowledge  and  judgment. 
Again,  agreements  which  are  clearly  opposed  to  public 
policy,  such  as  an  agreement  entered  into  for  the  com- 
mission of  a  crime,  are  invalid  and  would  not  be  enforced 
by  the  courts. 

IV.   THE  RIGHT  TO  ESTABLISH  PRIVATE  ENTERPRISES 

The  right  to  establish  private  enterprises  is  another 
fundamental  one  which  is  nevertheless  changing  and 
changeable.  It  is  only  within  the  last  century  that  the 
right  has  come  to  have  its  present  wide  scope,  especially 
in  the  case  of  corporations.  Many  restrictions  still  exist, 
as  in  the  case  of  the  liquor  traffic.  It  is  even  open  to 
serious  question  whether  society  has  not  gone  too  far  in 
our  own  country  in  the  direction  of  granting  freedom  to 
establish  private  business. 

V.   PERSONAL  LIBERTY 

Personal  liberty  or  freedom,  including  (1)  the  right  to 
move  from  place  to  place  at  pleasure,  and  (2)  the  right  of 
acquisition,  is  an  institution  which  we  are  perhaps  most 
likely  to  regard  as  necessary  and  natural  under  all  cir- 
cumstances. Yet  here  again  we  have  the  case  of  a  right 
which  has  been  very  slowly  acquired  by  society.  More- 
over, it  never  has  been,  is  not  to-day,  and  probably  never 
can  be,  an  unlimited  right.  It  is  the  endeavor  of  the 
State  to  equalize  human  liberty,  not  to  make  such  liberty 
absolute,  for  that  would  be  impossible.  The  question, 
then,  is  not  whether  we  shall  limit  liberty,  but  how  we 


16          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

can  so  limit  it  that  we  may  secure  a  maximum  of  liberty 

for  all. 

The  student  must  think  this  out  fairly  and  deliberately, 
casting  out  from  his  mind  every  argument  based  upon 
"natural  rights."  Only  when  he  has  substituted  therefor 
the  rule  of  human  welfare  will  he  be  prepared  to  study 
economic  questions  rationally  and  scientifically. 

For  the  maintenance  of  these  fundamental  conditions 
of  the  existing  social  order  which  we  have  described,  we 
are  dependent  upon  the  State.  No  other  instrument  of 
society  is  adequate  to  the  task.  The  maintenance  of  these 
foundations,  if  they  are  to  be  maintained  at  all,  can  be 
accomplished  in  no  other  way.  When  the  State  attempts 
this  and  little  more,  its  policy  is  said  to  be  passive. 
When  the  State  goes  far  beyond  this  in  endeavors  to 
promote  the  general  welfare,  its  policy  is  said  to  be 
active. 

Conclusion.  —  Let  us  remember,  then,  that  the  most 
fundamental  institutions  are  not  unchangeable,  but  that 
we  can  discover  their  beginnings  in  history,  and  can  trace 
their  development  through  manifold  and  unceasing  changes 
to  their  present  form.  Let  us  remember,  too,  that  as 
change  has  marked  the  past,  so  it  must  mark  the  future ; 
and  that  the  institutions  which  we  have  described,  funda- 
mental as  they  are,  are  not  "  natural,"  but  derive  their 
rational  justification  from  their  power  to  promote  human 
well-being.  Bearing  these  facts  in  mind,  we  may  free 
ourselves  from  two  opposing  errors,  from  which  many 
false  views  of  our  future  take  their  rise.  On  the  one 
hand,  we  may  hope  to  escape  the  pessimism  that  springs 
from  looking  at  the  existing  order  of  things  as  unalter- 
ably determined ;  and  on  the  other  hand,  we  may  escape 


THE  EXISTING  SOCIO-ECONOMIC  ORDER  11 

that  unreasoning  and  unreasonable  optimism  which  be- 
littles the  importance  of  our  fundamental  ideas  and  insti- 
tutions, and  which  inconsiderately  hopes  to  change  these 
in  the  twinkling  of  an  eye,  by  the  simple  expedient  of  a 
majority  vote. 

SUMMARY 

1.  There  are  certain  ideas  and  institutions  in  our  social  order  which 

are  so  fundamental  that  we  come  to  regard  them  as  "  natural " 
and  necessary. 

2.  Among  these    fundamentals    are   private    property,  guaranteed 

privileges,  contract,  the  right  to  establish  business  enterprises, 
and  personal  freedom. 

3.  Far  from  being  natural  or  necessary  to  every  state  of  society, 

these  rights  have  always  been  limited,  have  always  been  chang- 
ing, and  have  their  origin  and  justification  in  social  expediency. 

4.  History  warns  us  neither  to  overestimate  nor  to  underestimate  the 

importance  of  these  institutions.     They  may  be  changed,  but 
they  cannot  be  changed  easily  or  quickly. 

QUESTIONS 

1.  What  is  private  property?    Why  is  it  often  held  to  be  a  right 

which  is  not  open  to  question  or  discussion? 

2.  What  is  the  basis  of  human  rights  ?    Are  any  of  them  exempt 

from  the  need  of  examination  or  justification  ? 

3.  What  is  the  historical  origin  of  private  property  ? 

4.  What  limitations  does  the  State  set  to  private  property?    Is  the 

present  tendency  toward  an   increase  or  a  decrease  of  these 
limitations  ? 

5.  Ought  private  property  to  be  retained  ?    If  so,  why  and  how  far  ? 

6.  What  is  a  trade-mark?    A  copyright?    A  patent?    Discuss  their 

purpose  and  results. 

7.  What  limitations  are  properly  set  to  the  right  of  personal  free- 

dom ?    Of  what  does  the  right  to  personal  freedom  consist  ? 

8.  Discuss  the  idea  of  "  natural  rights." 

9.  From  what  two  opposed  errors  ought  a  true  idea  of  fundamental 

institutions  to  guard  us? 
c 


18          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


LITERATURE 

Mill,  John  Stuart :  Principles  of  Political  Economy,  Bk.  II,  Ch.  I,  §  2, 

and  Ch.  II,  §§  1,  5,  6,  and  7. 
Report  of  the   United   States  Commissioner  of  Patents   for   1888. 

(See  also  others  of  the  Patent  Commissioners'  Annual  Reports.) 


BOOK  II 

A  BRIEF  SKETCH   OF   ECONOMIC   HISTORY 

CHAPTER  I 
INTRODUCTORY 

What  Economic  History  Is. — In  beginning  the  study 
of  economic  history  it  will  be  well  for  us  to  recall  what 
has  been  said  in  a  preceding  chapter  as  to  the  nature  of 
the  subject  which  is  before  us.  The  history  of  literature, 
the  history  of  government,  the  history  of  religion,  and 
other  histories  which  tne  student  can  readily  call  to  mind 
have  one  thing  in  common :  they  are  all  of  them  histories 
of  man.  Each  of  them,  however,  treats  of  man  in  one  par- 
ticular line  of  his  activities.  It  is  the  same  with  economic 
history.  Its  subject  is  man,  but  it  deals  primarily,  not 
with  his  government  or  his  worship,  but  with  his  efforts 
to  get  a  living.  Many  who  have  held  a  narrow  view  of 
our  subject  have  objected  sneeringly  that  it  is  but  a 
"bread  and  butter"  science.  Even  if  this  were  a  just 
view  of  the  subject,  economics  would  still  be  worthy  of 
our  most  careful  study.  But  as  a  matter  of  fact,  it 
means  much  more  than  bread  and  butter.  It  is  plain 
on  a  moment's  reflection  that  every  kind  of  activity,  how- 
ever sublime,  depends  to  some  extent  upon  material  things. 
And  so  this  subject  of  ours — man  in  his  effort  to  acquire 
and  to  use  material  things,  to  satisfy  his  wants,  or,  in 

10 


20          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

other  words,  to  get  a  living — is  of  interest  to  every- 
body, and  is  closely  connected  with  every  kind  of  human 
effort. 

General  Survey. —  At  the  beginning  of  our  review  of 
the  history  of  man's  economic  efforts  we  are  struck  by 
the  fact  that  all  the  manifold  ways  of  getting  things 
may  after  all  be  reduced  to  two:  man  must  either  find 
things  or  make  them.  Of  course  the  two  ways  often 
combine  in  varying  proportions,  and  in  our  own  expe- 
rience the  two  are  constantly  shading  into  each  other; 
but  for  purposes  of  present  clearness  we  may  well  make 
the  distinction.  Now,  uncivilized  man  finds  the  things 
he  uses ;  civilized  man  adds  to  finding  the  art  of  making. 
Indeed,  material  civilization  consists  largely  in  wanting 
many  things  and  in  learning  how  to  make  and  to  use 
them. 

The  economic  activity  of  man  before  the  dawn  of 
recorded  history  is  enshrouded  in  so  much  of  mystery 
that  we  can  do  little  more  than  conjecture  regarding  it. 
We  have  evidence  to  show  that  prehistoric  man  ob- 
tained his  material  goods,  as  the  beasts  do,  simply  by 
taking  possession  of  natural  products,  exercising  little 
or  no  control  over  nature,  and  protecting  himself  from 
the  elements  only  by  caves  or  by  the  simplest  contriv- 
ances. 

Historical  Stages.  —  The  period  of  civilization  just  men- 
tioned is  something  so  remote,  something  about  which  our 
knowledge  is  so  uncertain  and  fragmentary,  that  we  are 
scarcely  able  to  treat  it  as  a  separate  stage  in  economic 
evolution  at  all.  We  may,  therefore,  pass  directly  to  a 
study  of  the  regular  stages,  beginning  with  the  time  when 
men  had  learned  to  kindle  fires,  to  eat  meat,  and  to  live  in 


INTE  OD  UCTOB  Y  21 

some  kind  of  political  communities,  however  imperfect.  Start- 
ing thus,  we  divide  the  course  of  man's  economic  develop- 
ment—  regarding  it  from  the  standpoint  of  his  means  of 
procuring  goods  —  into  five  stages,  as  follows :  — 

(1)  The  hunting  and  fishing  stage. 

(2)  The  pastoral  or  nomadic  stage. 

(3)  The  agricultural  stage. 

(4)  The  handicraft  stage. 

(5)  The  industrial  stage. 

The  evolution  of  economic  society  may,  from  a  some- 
what different  but  not  antagonistic  point  of  view,  be 
divided  into  the  four  following  stages :  — 

(1)  The  stage  of  independent  economy. 

(2)  The  stage  of  town  economy. 

(3)  The  stage  of  national  economy. 

(4)  The  stage  of  imperial  or  even  of  world  economy. 

Again,  looking  at  the  same  development  from  the 
standpoint  of  man's  ways  of  exchanging  goods  when  pro- 
duced, we  may  similarly  distinguish  the  three  following 

stages :  — 

(1)  The  stage  of  "  truck  "  or  barter  economy. 

(2)  The  stage  of  money  economy. 

(3)  The  stage  of  credit  economy. 

Still  again,  we  may  view  economic  evolution  from  the 
point  of  view  of  wage-earning  labor,  going  back  to  the 
period  when  enemies  taken  in  battle  were  slaughtered, 
and  passing  on  to  the  time  when  the  lives  of  the  con- 
quered were  spared  in  order  that  the  victors  might  hold 
the  vanquished  as  slaves.  We  then  have  the  four  follow- 
ing stages :  — 

(1)  Slaughter  of  enemies  taken  in  battle. 

(2)  Slavery  and  serfdom,  along  with  some  free  labor,  the  latter 
governed  by  custom  operating  through  contract. 


22 


ELEMENTARY  PRINCIPLES   OF  ECONOMICS 


(3)  Free  labor,  regulated  by  individual  contract,  but  with  increas- 
ing resort  to  group  contract,  and  with  legal  protection  of  labor.    Sla- 
very gradually  disappearing. 

(4)  Collective  bargaining,  regulated  increasingly  by  statute. 

These  classifications  may  now  be  brought  together  in  a 
single  table,  in  which  the  historical  relation  of  the  various 
classifications  will  be  shown,  the  first  classification  given 
—  the  one  in  the  second  column  of  the  table  —  being  re- 
garded as  the  principal  one. 

ECONOMIC  STAGES 


III.   STAGES  IN 

II.  STAGES     IN      THE    HISTORY     IV.  STAGES   IN 

I.  STAGES  IN  THE  His-      THE    HISTORY      OF    THE     DE-      THE    HISTORY 

TORY  OF  LABOR           OF      PRODUC-      VELOPMENTOF      of  TRANSFERS 

TION                                THE  ECONOMIC         OF  GOODS 

UNIT 

1.  Slaughter    of    ene-  f1'  The  huntinS 
mies                          1        and  nsnini? 

(.        stage. 

1.  The  stage  of 

1.  The  stage  of 

2.  Slavery    and    serf- 
dom,  along     with 

2.  The  pastoral 
stage. 

independent  , 
economy. 

barter  econ- 
omy. 

free    labor,    regu- 

3. The  agricul-  1 

lated    by    custom, 
operating  through 
contract. 

tural  stage.  ^_ 
r2.  The  stage  of 
4.  The     handi-  (        toWQ   ^ 

craft  staee. 

r2.  The       stage 
of      money 

1.        omy.               t.        economy. 

3.  Labor  regulated  by 

individual        con- 

tract, with  increas- 
ing   use  of   group 

3.  The       stage 
of  national 

contract,  and  legal 
protection  of  labor. 

5.  The      indus- 

economy. 

3.  The  stage  of 

Slavery  disappear- 

trial  stage. 

credit  econ- 

ing. 

4.  The       stage 

omy. 

4.  Collective    bargain- 

of      world 

ing,    regulated  in- 

economy. 

creasingly  by  stat- 

ute. 

IN  TE  OD  UCTOE  Y  23 

It  is  not  to  be  understood  that  these  stages  are  in  any  of 
the  classifications  distinctly  or  sharply  separated,  that  we 
can  fix  definite  dates  at  which  men  consciously  abandoned 
one  way  of  obtaining  goods,  or  of  exchanging  them,  and 
passed  to  another  method.  The  transition  from  one  stage 
to  another  is  slow  and  almost  imperceptible.  Those  stu- 
dents of  this  book  who  have  studied  botany  or  zoology 
will  understand  the  illustration  when  we  say  that  the 
stages  shade  into  one  another  as  do  the  varieties  of  closely 
related  genera  in  the  case  of  living  organisms.  Moreover, 
it  must  not  be  understood  that  all  of  the  features  of  an 
earlier  stage  pass  away  when  men  enter  into  the  newer 
way.  In  many  cases  all  of  the  features  of  the  old  survive 
and  even  have  an  increased  importance  in  the  later  stage. 
Thus  trades  and  commerce  are  to-day  carried  on  on  a  far 
larger  scale  than  they  were  in  the  handicraft  stage  itself; 
but  since  then  new  and  important  features  of  economic 
life  have  developed  to  give  a  new  character  to  the  age, 
and  we  seek  to  indicate  this  change  by  some  distinctive 
title.  To-day,  in  the  United  States,  we  can  find  illustra- 
tions of  nearly  all  the  stages  of  evolution  that  have 
been  mentioned.  Barter,  or  truck,  is  still  the  commonest 
mode  of  exchange  in  some  parts  of  the  country,  and,  in- 
deed, there  are  comparatively  few  places  in  which  credit 
transactions  have  in  the  main  taken  the  place  of  money 
transactions.  It  is  interesting  to  observe  that,  owing  to 
the  progressive  Western  movement  of  the  population  of 
the  country,  the  stages  in  the  history  of  man's  productive 
efforts  appear  in  regular  order  from  west  to  east.  Thus 
the  country  of  the  frontier  is  occupied  by  hunters  and 
trappers ;  next  are  great  stretches  of  country  which  are 
almost  entirely  devoted  to  grazing ;  farther  east,  agricul- 


24          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

ture  predominates ;  trades  and  commerce  are  active  espe- 
cially in  the  country  east  of  the  Mississippi ;  manufacture 
on  a  large  scale  is  found  especially  in  the  North  Atlantic 
and  North  Central  groups  of  States  ;  while  finally  the 
large  industrial  combinations  which  mark  the  latest  step 
in  development  are  confined,  at  least  as  far  as  their  legal 
residence  is  concerned,  to  the  Atlantic  seaboard. 

Our  study  of  the  history  of  man's  economic  develop- 
ment may  conveniently  take  the  form  of  a  study  of  the 
various  stages  which  have  been  mentioned,  and  more 
especially  of  the  stages  in  the  history  of  man's  produc- 
tive efforts. 

SUMMARY 

1.  Economic  history  is  the  history  of  man  in  his  efforts  to  get  a 

living ;  that  is,  to  get  the  things  needed  for  all  his  activities  of 
body  and  mind. 

2.  Uncivilized  man  finds  things ;  civilized  man  makes  them. 

3.  The  history  of  man  from  the  standpoint  of  his  productive  efforts 

may  be  divided  into  five  stages :  the  hunting  and  fishing 
stage,  the  pastoral,  the  agricultural,  the  handicraft,  and  the 
industrial  stage. 

4.  Other  subsidiary  classifications  are    based   upon  the   history  of 

transfers,  the  history  of  labor,  and  the  history  of  the  develop- 
ment of  the  area  of  the  economic  unit. 

QUESTIONS 

1.  What  is  included  in  the  term  "  living  "  ?    Mention  some  economic 

elements  in  religious  work.    In  education.    In  politics. 

2.  What  two  ways  are  there  of  getting  things?    In  which  way  can 

society  get  more  ? 

3.  What  do  we  know  of  the  economic  life  of  prehistoric  man? 

4.  What  are  the  five  stages  of  economic  progress  from  the  stand- 

point of  production  ?  The  three  stages  from  the  standpoint  of 
transfers?  The  four  stages  from  the  standpoint  of  labor  ?  The 


INTROD  UCTOR  Y  25 

four  stages  from  the  standpoint  of  the  size  of  the  economic 
unit? 
5.  What  can  you  say  of  the  distinctness  of  separation  of  these  stages  ? 

LITERATURE 

Biicher,  Carl:    Industrial   Evolution  (translated  from  the  German), 

especially  Chs.  I  and  II. 
Ely,  R.  T. :    Studies   in   the    Evolution  of   Industrial    Society,  Pt.  I, 

Ch.  III. 
Lubbock,  Sir  John  :   Prehistoric  Times,  especially  the  last  chapter ; 

also,  Origin  of  Civilization  and  Primitive  Condition  of  Man. 
Morgan,  L.  H.:  Ancient  Society,  Pt.  I,  Chs.  II  and  III. 
Schmoller,  Gustav:    The  Mercantile   System,  in  Ashley's  Economic 

Classics,  pp.  1-5. 
Stanley,  H.  M. :  In  Darkest  Africa,  Vol.  I,  Ch.  VII ;  Vol.   II,   Chs. 

XXIII  and  XXXIH. 


CHAPTER  II 

EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT 
I.   THE  HUNTING  AND  FISHING  STAGE 

General  Characterization.  —  In  the  first  stage  of  man's 
economic  development,  nature  is  the  great  factor  in  pro- 
duction. There  is  little  labor  and  less  capital.  Man 
contents  himself  with  what  nature  gives  him,  his  labor 
taking  the  form  of  appropriating  these  gifts.  He  has  not 
progressed  far  in  subjecting  animals  to  his  will ;  still 
less  does  he  attempt  to  improve  useful  animals  by  breed- 
ing. Transforming  natural  products  by  his  handicraft  is 
but  an  insignificant  part  of  his  activity.  Not  even  does 
he  store  up  goods  in  time  of  abundance  against  a  future 
time  of  dearth.  The  American  Indian,  where  he  has  not 
been  elevated  by  contact  with  a  higher  civilization,  is  a 
good  illustration  of  this  stage  of  economic  progress. 

Economic  activity  in  this  stage  is  in  a  high  degree  iso- 
lated. Hence  this  stage,  together  with  the  two  succeed- 
ing stages,  is  said  to  belong  to  the  period  of  independent 
economy.  In  other  words,  the  work  of  getting  goods  is 
not  carried  on,  as  with  us,  by  great  groups  of  men  scat- 
tered in  many  countries,  but  is  done  mainly  in  the  single 
family,  each  family  producing  most  of  the  things  which 
its  members  consume.  For  this  reason,  too,  there  is  little 
exchange  or  transfer  of  goods,  though  there  is  no  un- 

26 


EARLY  STAGES   OF  INDUSTRIAL  DEVELOPMENT     27 

willingness  to  make  exchanges  if  opportunity  offers  to 
secure  by  exchange  something  new  and  attractive. 

There  being  little  exchange  of  products  or  division  of 
labor,  it  follows  that  there  are  no  economic  classes  and  no 
industrial  conflicts.  The  greater  part  of  property,  in- 
cluding all  land,  is  the  common  possession  of  the  social 
group,  private  property  being  confined  to  arms  of  war, 
household  goods,  and  the  immediate  rewards  of  labor. 

Hunting  Tribes. — Although  we  have  grouped  the  hunt- 
ing and  fishing  tribes  together  as  being  upon  the  same 
plane  of  economic  evolution,  we  can  find  certain  clear 
differences  between  those  who  live  primarily  on  the  prod- 
ucts of  the  chase  and  only  secondarily  upon  fish,  and  those 
who  reverse  this  order.  Among  hunting  tribes  we  find 
the  work  and  life  leading  to  a  high  development  of  such 
qualities  as  cunning,  endurance,  and  bodily  strength,  but 
not  to  a  development  of  technical  skill  nor  to  a  reflection 
upon  the  processes  of  nature.  Their  condition  of  life 
prevents  the  possibility  of  any  but  a  sparse  population. 
It  has  been  estimated  that  in  a  population  living  solely 
upon  the  products  of  the  chase  each  hunter  requires  for 
his  support  more  than  fifty  thousand  acres,  or  seventy- 
eight  square  miles — an  area  which  in  the  state  of  Rhode 
Island  at  present  supports  on  an  average  nearly  thirty-two 
thousand  people.  It  follows  from  this  need  of  large  terri- 
tories that  war  becomes  an  economic  necessity  whenever 
there  is  not  an  abundance  of  unoccupied  land.  This  same 
condition  of  things  gives  us  one  of  the  causes  of  cannibal- 
ism. The  pressure  of  increasing  numbers  bringing  the 
people  continually  to  the  verge  of  starvation,  they  fall 
little  by  little  into  the  custom  of  eating  enemies  taken  in 
war. 


28          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Fishing  Tribes.  —  As  might  be  expected,  primitive  tribes 
of  fishing  people  are  more  peaceable  than  are  the  hunting 
tribes.  Their  population  is  denser,  both  because  of  their 
more  peaceable  disposition  and  because  of  the  fact  that  a 
smaller  area  is  sufficient  for  the  support  of  a  given  num- 
ber of  people  engaged  as  they  are.  Having  less  need  of 
frequent  migrations  to  seek  new  food  resources,  they  natu- 
rally form  larger  accumulations  of  capital.  They  build 
dwellings  of  a  more  permanent  character,  and  construct 
boats  and  fishing  implements.  On  the  whole,  we  may 
say  that  the  power  of  man  over  nature  is  greater  among 
fishing  than  among  hunting  tribes.  Primitive  fishing 
tribes  can  now  be  found  only  in  the  frigid  zone. 

II.  THE  PASTORAL  STAGE 

General  Characterization.  —  Between  uncivilized  man, 
who  uses  what  he  finds,  and  civilized  man,  who  makes 
what  he  wants,  there  is  a  middle  ground.  The  man  of 
this  middle  period  neither  depends  alone  on  what  he  can 
find,  nor  makes  things  to  any  great  extent,  as  we  com- 
monly think  of  making  things ;  but  rather  raises  things  ; 
in  other  words  he  has  learned  to  a  limited  extent  to  give 
direction  to  the  forces  of  nature.  He  has  learned  to  pro- 
duce, but  he  still  lives  chiefly  on  the  raw  materials  he  has 
coaxed  from  nature,  not  knowing  how  to  make  them  up. 
He  is  learning  to  labor  and  to  save.  To  be  sure,  he  very 
early  learns  the  art  of  making  a  few  simple  tools  like 
bows  and  arrows  and  primitive  stone  implements;  but  with 
these  few  exceptions,  it  is  worthy  of  note,  that  as  man 
learns  to  subdue  nature  he  begins  not  with  dead  nature,  — 
not  with  inanimate  things,  —  but  with  living  or  animate 
nature ;  he  uses,  not  metals,  but  animals  and  plants,  and 


EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT     29 

learns  to  increase  their  amount  by  artifice.  Moreover, 
of  these  two  classes  of  living  things,  he  first  subdues  the 
higher  form  of  life,  —  that  which  more  nearly  resembles 
his  own,  —  and,  as  a  general  rule,  not  until  long  after- 
ward does  he  learn  to  exercise  any  considerable  control 
over  plant  life  for  his  uses. 

Changes  that  mark  the  Stage.  —  When  hunting  tribes 
cease  to  depend  for  food  solely  upon  the  killing  or  cap- 
ture of  animals,  and  turn  to  the  art  of  taming  and  breed- 
ing them,  such  tribes  are  entering  upon  the  second  great 
era  of  economic  progress,  which  we  have  called  the  pas- 
toral stage.  Even  in  the  hunting  stage  there  lay  the 
beginnings  of  such  progress,  in  the  taming  of  dogs  and 
horses  for  hunting ;  but  when  extensive  pasturing  of  ani- 
mals for  food  and  clothing  takes  place,  the  pastoral  stage 
has  well  begun.  Marked  features  of  the  earlier  stage  still 
continue,  however.  Thus,  while  man  now  lives  chiefly 
upon  his  flocks,  he  still  leaves  the  flocks  to  live  upon 
what  they  can  find.  So,  while  man  no  longer  needs  to 
wander  in  search  of  his  own  food,  he  must  nevertheless 
do  so  for  the  food  of  his  flocks.  Cities  are  therefore  still 
impossible.  Moreover,  though  the  land  will  now  support 
many  more  inhabitants  than  before,  much  land  is  still 
needed  for  the  necessary  pasture,  and  tribes  and  families 
roaming  broadly  to  search  for  desirable  situations  fre- 
quently come  into  sharp  collision.  According  to  the  cal- 
culations of  the  celebrated  geographer,  Professor  Ratzel, 
nomadic  populations  require,  on  an  average,  about  a 
square  mile  for  every  two  to  five  persons.  Wars,  there- 
fore, continue,  keeping  down  population,  but  with  one 
important  change:  the  victims  of  war  for  a  long  time 
continue  to  be  generally  slaughtered,  the  women  and 


30          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

children  being  more  frequently  spared  than  the  men ;  but 
men  who  have  flocks  to  furnish  them  food  in  time  cease  to 
eat  human  flesh.  Captives  later  come  to  be  recognized  as 
of  use  in  serving  their  captors,  and  thus  slavery  succeeds 
cannibalism  and  slaughter.  Slavery  could  not  have  be- 
come extensive  in  the  earlier  stage,  because  slaves  without 
weapons  would  have  been  of  little  use  when  women  did 
nearly  all  the  drudgery,  and,  on  the  other  hand,  slaves 
with  weapons  would  have  been  a  constant  menace  to  their 
masters. 

Migrations. — Wanderings  of  whole  peoples  were  very 
common,  due  in  some  cases  to  the  exhaustion  of  old  feed- 
ing-grounds, and  in  other  cases  to  the  natural  increase  in 
numbers  when  a  tribe  had  been  long  established  in  one 
place.  It  was  such  overpopulation  that  brought  about 
the  warlike  incursions  of  barbarian  hosts  into  Europe 
from  the  heart  of  Asia,  and  the  wanderings  of  the  na- 
tions in  the  early  centuries  of  the  Christian  era. 

Little  Land  Ownership. — It  follows  from  what  we  have 
already  said  that  there  was  little  ownership  of  land  in  the 
sense  in  which  we  now  regard  ownership.  Tribes  as 
a  whole  would  lay  claim  to  certain  districts  for  a  time, 
and  would  try  to  keep  other  tribes  from  pasturing  there. 
But  individuals  of  the  tribe  would  own  no  land,  or  at 
most  very  little.  The  notion  of  land  ownership  develops 
only  when  the  land  itself  becomes  more  useful,  and  when 
the  fruits  of  its  fertility  can  be  more  directly  appropriated 
than  could  happen  when  laud  was  used  for  pasturing. 

Private  Property. — Yet  private  property  in  other  things 
than  land  had  now  become  not  uncommon.  Even  great 
accumulations  of  wealth  took  place,  consisting  of  flocks, 
gold,  silver,  finely  woven  fabrics,  and  precious  stones,  — 


EARLY  STAGES   OF  INDUSTRIAL  DEVELOPMENT     31 

in  short,  such  things  as  very  early  appeal  to  the  barbarian 
taste  for  showy  ornament,  and  which  may  be  transported 
from  place  to  place  with  relative  ease.  We  also  find, 
even  at  this  early  time,  great  differences  in  the  wealth 
of  individuals,  the  rich  and  the  poor  being  sharply  con- 
trasted with  each  other. 

Little  Commerce. — In  spite  of  the  growth  of  wealth 
among  men,  there  was  little  exchange  or  commerce.  The 
reason  for  this  is  not  far  to  seek.  In  order  to  have  com- 
merce, not  only  must  there  be  wealth,  but  the  wealth 
must  be  diversified.  There  is  little  to  be  gained  by 
exchanging  ox  for  ox.  Of  course  in  the  other  classes  of 
goods  to  which  we  have  referred  there  was  some  little 
traffic,  but  trade  in  the  modern  sense  of  the  word  can 
hardly  be  said  to  have  existed.  The  economy  of  each  large 
family  or  household  was  in  the  main  sufficient  unto  itself. 

The  Origin  of  Exchange. — Such  trade  as  did  exist  was 
carried  on  by  barter,  or  by  the  still  earlier  form  of  ex- 
changing gifts.  It  is  an  interesting  fact  that  barter,  the 
earliest  form  of  regular  exchange,  grew  originally  out  of 
the  practice  of  making  presents.  Among  many  primitive 
peoples  to-day,  barter  is  not  recognized  as  an  institution, 
but  when  one  person  presents  a  gift  to  another,  he  waits 
expectantly  for  a  gift  in  return,  and  when  he  receives  it, 
scans  it  closely  to  make  sure  that  he  has  received  an 
equivalent  for  his  generosity. 

III.   THE  AGRICULTURAL  STAGE 

General  Characterization.  —  Man's  next  accomplishment, 
which  carries  him  a  distinct  stage  farther  in  his  develop- 
ment, is  of  immense  importance.  Already  knowing  how 
to  manage  animals  to  advantage,  he  now  learns  to  "  man- 


32         ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

age  "  plants,  and  to  raise  them  at  will.  Agriculture,  as  a 
means  of  support,  is  thus  added  to  the  keeping  of  flocks 
and  to  the  chase.  A  greater  variety  of  food  is  in  this  way 
made  possible  for  man,  who  now  ceases  his  wandering  life. 
A  much  denser  population  is  the  result.  Professor  Ratzel's 
calculations  indicate  that  the  early  agricultural  popula- 
tions were  about  six  times  as  dense  as  the  pastoral  popula- 
tions. With  a  denser  population  remaining  permanently 
in  fixed  abodes,  new  relations  spring  up  among  men,  new 
duties,  new  arts,  and  new  possibilities  of  civilization.  It 
is  in  these  conditions  that  the  political  whole  which  we 
know  as  a  nation  has  its  beginning. 

Land  Ownership.  —  Along  with  growing  density  of  pop- 
ulation and  increasing  permanency  of  settlement  goes  a 
third  result,  —  the  private  ownership  of  land.  Successful 
cultivation  of  the  soil  requires  detailed  personal  care  and 
attention,  and  some  sort  of  division  of  the  land  was  hence 
seen  to  be  necessary.  The  first  parcelling  out  of  the  land, 
however,  by  no  means  gave  rise  to  permanent  private  own- 
ership. The  tribe,  or  community,  still  owned  the  land,  as 
is  the  case  to-day  with  the  Russian  village  community 
known  as  the  Mir,  and  the  division  was  recognized  as  but 
temporary  and  for  purposes  of  convenience. 

The  Origin  of  a  Laboring  Class.  —  Perhaps  the  most  im- 
portant result  of  the  change  which  produced  the  agricul- 
tural stage  was  the  growth  of  slavery  as  an  institution. 
As  we  have  said,  slavery  had  its  beginnings  in  the  preced- 
ing periods,  but  it  is  only  in  the  agricultural  stage  that  it 
becomes  an  important,  almost  a  fundamental,  economic  in- 
stitution. Tending  the  herds  did  not  call  for  persistent 
labor,  but  the  prose  of  tilling  the  soil  is  undisguised  work, 
and  primitive  men  were  not  fond  of  work,  nor  had  they 


EARLY  STAGES   OF  INDUSTRIAL  DEVELOPMENT     33 

been'  trained  by  long  usage  to  submit  to  it  as  to  an  un- 
pleasant habit.  It  is  not  strange,  then,  that  they  should 
have  saved  the  lives  of  men  conquered  in  battle  with  the 
design  of  putting  upon  them  the  task  of  tilling  the  soil. 
This  seems  to  us  perhaps  a  poor  reason  for  being  humane, 
but  where  humanity  is  the  result,  a  poor  reason  is  better 
than  none.  Free  labor  has  become  possible  only  because 
for  century  after  century  certain  men  labored  not  from 
choice  but  from  necessity.  As  they  became  free,  labor 
became  free,  and  the  habit  of  labor  had  become  fixed  in 
the  race. 

Commerce. — With  every  increase  of  wealth  the  tendency 
to  trade  also  increases,  but  as  yet  the  occasion  for  trade 
was  slight,  since  men's  wants  and  wealth  were  still  every- 
where much  the  same.  Such  trade  as  existed  ministered 
chiefly  to  the  love  of  luxury,  and  this  long  continued  to 
be  the  case.  It  was  probably  in  part  from  this  cause  that 
the  ancient  philosophers  and  the  early  fathers  of  the 
Christian  Church  displayed  great  hostility  to  commerce. 

Laws  and  Customs  reflecting  Ideas.  —  There  remains  to 
be  noted  the  change  and  enlargement  in  men's  ideas,  as 
reflected  in  their  laws  and  customs.  The  Mosaic  code, 
framed  to  govern  a  people  in  the  pastoral  and  agricultural 
stages,  furnishes  us  the  best  source  of  information  regard- 
ing these  new  ideas.  Even  before  this  time  there  had 
been  numerous  customs  regulating  life,  but  in  the  Mosaic 
code  we  are  struck  by  the  great  increase  of  duties  and  re- 
strictions which  were  then  recognized.  With  fixed  resi- 
dence had  come  the  State,  with  its  justice,  its  guidance, 
and  its  protection  —  its  many  thou  shalts  and  thou  shalt 
nots;  and  all  this  because  men  had  now  come  to  be  perma- 
nent neighbors,  and  therefore  had  the  utmost  need  of  a 


34          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

definite  understanding  to  keep  them  from  trespassing  vol- 
untarily and  involuntarily  on  one  another's  liberty.  If 
men  are  to  live  close  together  and  accumulate  property 
and  enjoy  it  in  peace,  there  must  always  be  general  agree- 
ment among  the  many,  and  vigorous  compulsion  for  the 
few. 

"Neighbor"  and  "Stranger."  —  It  is  worthy  of  notice, 
however,  that  for  a  long  time  duties  and  laws  were  chiefly 
recognized  as  being  applicable  at  home.  Beyond  the 
boundaries  of  the  tribe  or  nation  they  were  scarcely  held 
to  be  binding  at  all.  Thus,  for  instance,  in  the  early 
Germanic  communities,  when  the  scattered  tribes  were 
still  small  and  separated  by  unoccupied  land,  the  members 
of  each  tribe  lived  in  relations  of  brotherhood,  holding 
property  in  common  and  closely  guarding  all  mutual 
rights.  But  when  different  tribes  came  together  to  trade 
on  the  neutral  ground,  or  Mark,  all  kinds  of  sharp  prac- 
tice were  deemed  admissible.  Things  not  to  be  thought 
of  at  home  here  passed  unquestioned. 

Duration  of  the  Agricultural  Stage.  —  The  agricultural 
stage  lasted  for  centuries  among  many  peoples.  In  the 
development  of  the  civilization  of  Western  Europe,  it  did 
not  evolve  into  a  higher  form  until  the  tenth  and  eleventh 
centuries,  when  the  great  movement  toward  the  building 
of  cities  began.  Of  course  it  has  not  been  wholly  dis- 
placed by  subsequent  stages  of  economic  life,  but  only 
modified  —  unceasingly  modified  —  in  the  progress  of 
time.  The  marks  of  the  earlier  stage  are  clearly  discern- 
ible even  in  our  industrial  life  in  America. 


EAELT  STAGES  OF  INDUSTRIAL  DEVELOPMENT     35 

IV.    THE  HANDICRAFT  STAGE 

General  Characterization.  —  We  have  said  on  an  earlier 
page  that  real  material  civilization  begins  with  making 
things ;  it  is  with  the  stages  in  which  men  make  things 
that  we  have  now  to  deal.  Speaking  very  generally,  we 
may  say  that  men  make  things  in  either  of  two  ways  :  by 
the  hands  directly,  sometimes  assisted  by  simple  tools ;  or 
by  the  hands  indirectly,  through  the  mediation  of  machin- 
ery, generally  propelled  by  other  than  man's  power.  As 
was  natural,  man  in  his  progress  came  first  to  make  things 
with  his  hands  directly,  learning  later  to  quicken  and  im- 
prove his  work  by  the  use  of  machinery  and  the  employ- 
ment of  power  produced  by  animals  or  wind  or  steam. 
The  very  word  "  manufacture,"  which  we  use  to  represent 
the  idea  of  making  things,  meant  in  earlier  days  making 
things  by  hand,  as  the  Latin  words  from  which  the  longer 
word  is  formed  indicate.  As  the  word  has  since  had  an 
extension  of  meaning,  we  may  say  that  there  are  two  kinds 
of  manufacture :  (1)  hand  manufacture,  and  (2)  power 
manufacture.  Hand  manufacture  is  the  foundation  of  the 
fourth  stage. 

It  goes  without  saying  that  labor  and  capital —  the  fruit 
of  past  labor  used  for  increasing  the  product  of  the  labor 
of  the  day  —  now  become  more  important  than  ever  before. 
Man  by  his  skill  transforms  raw  materials :  he  learns  to 
weave  fabrics  and  to  fashion  things  in  wood  and  metal ; 
to  use  inanimate,  as  well  as  animate,  nature.  The  chief 
results  of  this  will  be  more  clearly  seen  as  we  discuss  them 
under  separate  headings. 

1.  Trades.  —  Skill  in  doing  comes  from  repeated  doing. 
"The  Jack  of  all  trades  is  master  of  none."  With  the 


36          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

coming  of  manufacture,  therefore,  self-interest  leads  men 
to  specialize  so  far  as  the  needs  and  circumstances  of  the 
time  will  permit  them  to  do  so  with  profit.  Hence,  in 
this  stage,  we  find  division  of  occupations,  whereby  some 
men  become  blacksmiths,  some  shoemakers,  some  weav- 
ers, etc.  Many  surnames,  such  as  Smith,  Baker,  Joyner, 
Taylor,  owe  their  origin  to  a  time  when  such  specializa- 
tion was  more  remarked  upon  than  at  present. 

2.  Commerce.  —  We  have  more  than  once  mentioned  the 
fact  that  there  can  be  little  commerce  so  long  as  men  are 
mostly  engaged  in  the  same  kind  of  business.  But  when 
communities  become  larger ;  when  their  wants  grow  more 
various  and  their  goods  consequently  of  greater  extent 
and  diversity ;  when,  finally,  it  becomes  possible  for  men 
to  specialize  in  their  occupations,  commerce  becomes  not 
so  much  a  result  as  a  necessary  incident.  When  each 
man  has  his  trade  and  makes  articles  of  only  one  kind,  he 
will  neither  want  all  the  things  that  he  makes,  nor  make 
all  the  things  that  he  wants.  He  must  make  exchanges. 
And  so,  whenever  manufacture  develops,  we  find  trade 
growing  up  with  it  as  a  necessity.  We  cannot  say  that 
manufacture  results  in  commerce,  nor  that  commerce  re- 
sults in  manufacture.  We  must  rather  look  upon  the  two 
as  mutually  causing  each  other,  their  joint  cause  lying  in 
the  growing  culture  and  wants  of  mankind.  This  stage, 
on  account  of  the  appearance  of  commerce,  is  frequently 
designated  as  the  trades  and  commerce  stage,  but  it  may 
also  be  designated  more  simply  as  the  handicraft  stage, 
inasmuch  as  it  is  dominated  by  handicrafts,  and  commerce 
has  in  this  stage  far  less  significance  than  in  modern  times. 

With  the  growth  of  commerce,  some  men  find  it  profit- 
able to  spend  all  their  time  in  exchanging  goods  which 


EAELT  STAGES  OF  INDUSTRIAL  DEVELOPMENT     37 

other  men  make,  earning  their  compensation  by  saving 
the  makers  the  greater  time  and  trouble  which  direct 
exchanges  would  necessarily  involve.  Moreover,  different 
countries  also  find  an  advantage  in  exchanging  their 
respective  products,  and  here  again  men  of  special  train- 
ing are  needed  to  carry  on  the  work  of  exchange.  Such 
commerce  as  grows  up  during  this  stage  between  different 
countries  or  communities  is  much  handicapped  by  the  in- 
adequate means  of  communication ;  but  where  goods  can 
be  carried  by  water,  commerce,  even  in  bulky  commodi- 
ties, takes  on  considerable  proportions. 

3.  Money.  —  Of  course,  for  such  a  general  system  of 
exchange,  barter  was  entirely  inadequate.  Among  primi- 
tive peoples  barter  is  the  only  mode  of  effecting  exchanges, 
and  travellers  among  savage  tribes  tell  amusing  stories  of 
the  difficulties  experienced  in  securing  goods  by  such  a 
system.  We  cannot  here  enter  into  a  full  discussion  of 
the  limitations  of  barter,  but  we  may  speak  of  one  of  the 
chief  requisites  for  any  exchange  by  barter,  —  the  need  of 
what  one  writer  has  called  coincidence  of  desire.  By  this 
expression  it  is  meant  that  before  an  exchange  can  take 
place  by  barter,  the  man  who  has  a  superfluity  of  one  good 
and  wants  another  must  find  a  second  person  whose  super- 
fluity and  want  are  reciprocal  to  his  own.  The  rarity  of 
such  coincidence  is  itself  sufficient  to  prevent  barter  from 
serving  as  an  efficient  method  of  exchange.  In  the  course 
of  time,  as  men  bartered  one  with  another,  it  was  found 
that  certain  things  were  more  generally  acceptable  than 
others,  and  that  some  one  thing  or  some  few  things  were 
most  generally  acceptable.  These  generally  acceptable 
goods  have  varied  in  different  stages  of  economic  develop- 
ment and  in  different  places.  Among  primitive  peoples, 


38          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

articles  of  adornment  have  usually  held  such  a  place.  As 
people  grew  to  learn  that  such  articles  were  generally 
acceptable,  they  would  use  them  more  and  more  in  their 
exchanges,  and  the  frequency  of  use  would  in  turn  in- 
crease the  recognized  utility  of  possessing  them.  With- 
out going  further  with  our  explanation,  we  may  say  that, 
spontaneously  and  in  large  part  by  unconscious  processes, 
there  has  always  grown  up  among  every  people  some  one  gen- 
erally accepted  and  recognized  medium  of  exchange  or  some 
few  things  that  have  been  so  recognized.  As  this  medium 
grew  in  acceptability  and  cognizability,  it  took  on  more  and 
more  the  character  of  what  we  know  as  money.  It  was  dur- 
ing the  handicraft  or  trades  and  commerce  stage  that  gold 
and  silver,  already  much  used  for  this  purpose,  came  to 
have  that  universal  recognition  for  their  desirability  in 
exchanges  that  made  them  money. 

4.  Cities.  —  Among    those    employed    in    agricultural 
pursuits,  there  is  a  tendency  to  form  village  communities, 
but  in  the  agricultural  stage  such  communities  cannot  be- 
come populous,  because  agriculture  requires  a  scattered 
population.     Manufacture,  on  the  other  hand,  has  an  oppo- 
site tendency.     If  men  are  to  live  by  their  trades  and  by 
exchanging  with  one  another,  it  is  important  that  they  be 
near  one  another.     Thus  cities,  situated  conveniently  for 
commerce  on  the  coast  or  on  great  rivers,  develop  when- 
ever men  learn  to  manufacture. 

5.  The  Grild  System.  — New  forces  coming  into  society 
do  not  take  care  of  themselves.     So  the  trades  had  to 
organize  in  order  to  reduce  their  business  to  some  kind  of 
order.     Each  trade  had  its  gild,  which  specified  in  de- 
tail how  the  business  should  be  carried  on,  how  many 
should  be  admitted  to  it,  and  how  the  trade  should  be 


EARLY  STAGES  OF  INDUSTRIAL  DEVELOPMENT     39 

learned.  Where,  as  was  usual,  the  gilds  controlled  the 
government  of  the  cities,  these  rules  were  early  sanctioned 
by  law. 

6.  Political  Freedom.  —  Throughout  most  of  Europe  the 
agricultural  stage  had  culminated  in  the  feudal  system. 
Under  that  system  the  feudal  lord  occupied  a  command- 
ing position,  very  like  that  held  by  a  patriarch  in  an 
earlier  pastoral  state,  and  owned  the  land  occupied  by  the 
tribe  or  people.  The  tillers  of  the  soil  had  become  serfs, 
who,  though  they  could  not  be  sold  away  from  the  land, 
were  obliged  to  stay  on  the  lord's  domain  and  work  for 
him  for  such  reward  as  he  chose  to  give  them,  or  such  as 
custom  and  public  opinion,  powerfully  backed  up  by  the 
Church,  had  established.  Slavery  thus  gave  way  before 
serfdom.  The  manufacturing  cities  very  naturally  be- 
came rivals  of  these  great  feudal  estates.  The  lords,  feel- 
ing their  power  threatened,  bitterly  opposed  the  cities. 
And  so  there  were  wars  and  alliances  and  treaties,  until 
finally  the  cities  conquered,  as  they  were  bound  to  do  in 
the  end.  These  cities  were  free  cities,  and  serfs  who  fled 
to  them  were  accepted  and  made  free.  Thus  feudalism 
began  to  break  down,  and  in  the  gradual  disappearance  of 
slavery  and  serfdom,  man's  progress  in  the  art  of  getting 
a  living  resulted  in  another  great  step  toward  liberty  and 
humanity. 

SUMMARY 

1.  Uncivilized  man  gets  his  living  by  hunting  or  fishing,  or  by  both. 

2.  Economic  activity  in  the  earliest  stage  is  largely  isolated. 

8.  Hunting  tribes  differ  in  character  from  fishing  tribes,  owing  to 

the  difference  in  the  conditions  of  their  life. 
4.   The  domestication  of  animals,  leading  to  the  pastoral  stage,  assures 

subsistence,  introduces  slavery,  and  increases  wealth. 


40          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

5.  The  pastoral  stage  has  little  landownership  or  commerce,  and  is 

marked  by  frequent  tribal  migrations. 

6.  In  the  agricultural  stage,  man  adds  the  "  management "  of  plant 

life  to  his  earlier  management  of  animal  life,  thus  making  his 
existence  more  secure  and  population  more  dense. 

7.  Cultivation  of  the  soil  fixes  residence,  extends  law  and  custom, 

and  develops  tribal  ownership  of  land  and  a  distinct  laboring 
class. 

8.  Economic  civilization,  which   begins  with  the  making  of  things, 

appears  in  the  handicraft  stage,  called  also  the  trades  and  com- 
merce stage. 

9.  In  the  handicraft  stage,  money  is  regularly  used,  trades  are  de- 

veloped and  organized  in  gilds,  and  cities,  rising  from  the  new 
commerce,  become  free  and  break  down  the  feudal  system. 

QUESTIONS 

1.  What  is  the  economic  mark  of  savagery  ?    How  do  hunting  and 

fishing  tribes  differ  ?     Why  ? 

2.  What  is  the  economic  mark  of  semi-civilization?    What  stages 

have  this  as  their  special  character? 

3.  What  other  economic  changes  from  the  earlier  stage  are  found  in 

the  pastoral  stage  ? 

4.  What  is  the  fundamental  difference  between  the  agricultural  stage 

and  the  pastoral  ?    What  economic  results  flow  from  this  differ- 
ence ? 

5.  What  is  the  economic  mark  of  civilization?    What  stages  have 

this  special  character? 

6.  What  is  the  relation  between  trades  and  commerce  ? 

7.  What  great  economic  institutions  grew  out  of  trades  and  com- 

merce? 

LITERATURE 

See  references  at  close  of  preceding  chapter.     Also :  — 

Ashley,  W.  J. :  Introduction  to  English  Economic  History  and  Theory, 

Ch.  I,  §  6. 

Biicher,  C. :  Industrial  Evolution,  p.  154. 
Cunningham,  W. :  The    Growth   of  English  Industry  and  Commerce, 

Ch.  IV,  §  114. 


EAELY  STAGES   OF  INDUSTRIAL  DEVELOPMENT     41 

Ely,  R.  T. :  Studies  in  the  Evolution  of  Industrial  Society,  Part  n,  Ch. 

XII. 

Genesis,  Ch.  XHL 

Maine,  Sir  Henry :  Early  Law  and  Custom,  Ch.  VIII. 
Rogers,  J.  E.  Thorold :  Work  and  Wages,  Ch.  IU,  pp.  55-66. 


CHAPTER   III 
THE   INDUSTRIAL   STAGE   IN   ENGLAND 

WE  come  now  to  the  last  of  the  stages  in  man's  eco- 
nomic development.  Inasmuch  as  this  last  stage  is  the  one 
in  which  we  are  living,  it  will  be  well  to  give  to  it  a  more 
detailed  study  than  has  been  given  to  the  preceding  stages. 
After  a  general  description  of  the  characteristic  differences 
between  the  industrial  stage  and  the  stage  which  preceded 
it,  we  shall  pass  on  to  study  the  history  of  the  great  move- 
ment by  which  the  industrial  stage  was  ushered  in.  As 
it  was  in  England  that  the  movement  began,  and  as  it  is 
in  the  United  States  that  the  movement  has  perhaps 
proceeded  to  the  greatest  extreme,  we  shall  consider  the 
history  of  the  movement  with  reference  to  these  two 
countries. 

A  closer  study  of  the  period  than  we  shall  be  able  to 
devote  to  it  would  disclose  the  fact  that  the  industrial 
stage  has  up  to  the  present  shown  three  distinct  phases. 
The  distinguishing  characteristic  of  the  earliest  phase  — 
say  from  1760  to  1830  —  was  development  of  machine 
industry  and  the  application  to  it  of  steam  power.  From 
about  1830  to  about  1870  the  distinguishing  character- 
istic of  industry  was  the  development  of  steam-power 
transportation.  From  the  latter  date  to  the  present,  the 
most  striking  fact  in  industry  has  been  the  concentration 
and  integration  of  capital  in  the  fields  of  manufacture 

42 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  43 

and  transportation.  To  study  these  minor  periods  in  de- 
tail would  require  greater  space  than  can  be  given  to  the 
subject  in  a  book  of  this  sort ;  but  in  our  study  of  condi- 
tions in  the  United  States  at  various  points  in  the  text 
we  shall  have  occasion  to  throw  further  light  upon  them. 

I.   THE  INDUSTRIAL  STAGE 

General  Characterization.  —  As  we  have  said,  man  may 
manufacture  by  hand  or  by  power.  It  was  a  great  step 
forward  when  man  learned  to  manufacture  at  all;  it  was 
a  transformation  of  society  when  man  learned  to  manu- 
facture by  power.  Mere  human  muscle  is  an  insignificant 
force  as  compared  with  the  external  forces  of  nature,  and 
man's  greatest  accomplishments  when  he  depends  upon 
his  own  unaided  efforts  are  relatively  unimportant.  But 
man  has  more  brains  than  any  other  creature,  and  pro- 
gresses by  their  use. 

It  is  hardly  necessary  to  state  to  the  student  that  the 
industrial  stage  began  with  the  inventions  and  discoveries 
which  resulted  in  the  steam-engine.  The  date  usually 
associated  with  this  important  change  is  1769.  Here,  as 
in  the  preceding  chapter,  it  will  conduce  to  clearness  if  we 
analyze  the  situation  and  show  the  characteristic  contrasts 
between  the  industrial  stage  and  the  former  stage  of 
economic  development. 

1.  Relation  between  Classes.  —  Under  the  old  system  of 
hand  manufacture,  each  master  in  a  trade  worked  by  him- 
self or  with  a  few  others,  apprentices  or  journeymen,  who 
in  time  would  normally  become  masters  themselves. 
Hence  we  may  say  that  men  in  the  full  possession  of  their 
trade  worked  on  their  own  account  and  owned  what  they 
made  as  well  as  the  means  of  manufacture.  When  prices 


44          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

rose,  the  benefit  went  to  them.  Strictly  speaking,  there 
were  no  class  divisions  in  manufacture,  an  apprentice  or 
a  journeyman  being  simply  a  master  "in  the  making," 
living  on  terms  of  intimacy  in  the  master's  family,  and  in 
many  cases  marrying  the  daughter  of  the  master  and  later 
succeeding  to  the  business. 

Rise  of  Factories.  —  But  it  is  manifestly  impossible  for 
every  workman  to  own  an  engine  and  elaborate  manu- 
facturing machinery.  The  result  of  the  application  of 
steam  to  manufacturing,  therefore,  was  that  a  few  men, 
more  enterprising  or  wealthier  than  the  rest,  made  the  ex- 
periment, bought  high-priced  machinery,  employed  work- 
men, and  quickly  distanced  the  conservative  ones  who 
resisted  the  change.  Under  these  conditions,  as  we  can 
now  see,  the  factory  system  was  bound  to  grow  and  to 
supplant  the  old  system  of  house  industry.  Those  who 
resisted  had  to  go  to  the  wall.  They  did  not  enjoy  the 
process  nor  were  they  patient  under  its  operation ;  but  at 
length,  their  fortunes  wasted,  their  business  ruined,  their 
hope  of  successful  resistance  gone,  they  yielded  and  sul- 
lenly sought  places  as  workmen  in  the  new  factories. 

Before  this  great  industrial  change,  employer  and  em- 
ployed were  not,  as  we  have  said,  sharply  or  permanently 
divided  by  class  distinctions.  Living  and  working  to- 
gether, apprentice  and  master  had  that  mutual  respect, 
which  came  from  the  remembrance  of  his  own  apprentice- 
ship on  the  part  of  the  master,  and  the  assurance  of  a 
future  position  of  independence  in  the  breast  of  the  ap- 
prentice. Now  we  have  two  distinct  industrial  classes, 
with  interests  that  seem  irreconcilable,  and  between  them 
is  fixed  a  great  gulf  which  in  an  old  society  comparatively 
few  men  can  hope  to  cross. 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  45 

2.  The    Wages  System.  —  Formerly  the  workman   had 
what  he  made  and  sold  it  for  what  he  could  get.     This 
was  natural  under  a  system  of  divided  labor  in  which  each 
man  made  one  article  and  that  a  whole  article.     But  in 
the  more  efficient  processes  of  production  that  obtain  to- 
day, there  is  necessary  a  much  greater  division  of  labor,  or 
rather  combination  of  labor.     Now,  it  requires  many  men 
working  together  to  make  a  single  article  efficiently.    But 
when  a  group  of  men  have  made  a  case  of  shoes,  of  which 
one  has  cut  out  the  soles,  another  has  made  the  heels,  etc., 
who  can  say  how  many  shoes  the  individual  workman  has 
made?     Then,  too,  the  employer  has  furnished  materials 
and  machinery  and  has  assumed  the  risk  of  loss.     He 
must  be  paid.     How  many  shoes  shall  be  his  portion  of 
the  whole?     Some  way  out  of  the  trouble  must  be  found. 
As  a  matter  of  fact  the  way  adopted  was  the  simplest  one 
and  perhaps  the  best.     The  employer  takes  all  the  shoes, 
and  gives  the  workmen  for  their  labor,  not  the  actual 
product  of  their  labor,  but  a  stipulated  wage  which  is 
represented  to  be  an  equivalent.     And  thus  has  grown 
up  the  modern  "  wages  system  "  of  employing  labor. 

3.  Competition.  —  Under  the  old  gild  system  of  manu- 
facturing for  purely  local  markets,  prices,  as  well  as  many 
other  elements  of  industry,  were  regulated  by  custom  or 
law.     The  man  trying  to  undersell  his  neighbor  would 
have  been  an  object  of  public  contempt  and  hatred.     Men 
sometimes  entered  into  rivalry  or  competition  to  see  who 
could  make  goods  of  the  best  quality,  but  even  here  cus- 
tom and  law  sometimes  entered  to  reduce  all  to  a  dead 
level  by  determining  what  the  quality  of  the  commodity 
should  be. 

But  with  the  growth  of  great  markets  in  the  industrial 


46          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

stage  all  this  was  changed.  Factories  now  competed  not 
for  the  trade  of  a  single  city  or  county,  but  for  that  of  a 
whole  country  or  of  the  world.  The  producers  were  no 
longer  neighbors  living  in  close  and  friendly  intercourse, 
but  great  hostile  businesses  often  situated  in  different  parts 
of  the  country.  The  earlier  stage  had  been  prevailingly  a 
period  of  "  town  economy  " ;  the  new  stage  was  a  period 
of  "national  economy,"  which  in  our  own  time  has  de- 
veloped into  something  very  like  a  "world  economy." 
Under  such  conditions,  competition  once  begun  must  go 
on  getting  ever  fiercer  and  fiercer.  It  was  not  a  competi- 
tion in  well-doing,  but  in  money-making. 

The  struggle  had  its  good  results.  It  was  what  men 
needed  to  stimulate  their  energy  and  enterprise.  In- 
vention followed  invention;  business  rapidly  centred  in 
places  where  it  could  be  carried  on  at  the  greatest  advan- 
tage ;  labor  processes  were  divided  and  subdivided  as  the 
increase  of  machinery  and  the  growth  of  markets  ren- 
dered division  profitable,  and  by  these  and  other  means 
the  cost  of  production  was  constantly  lowered. 

Thinkers  of  the  time  not  unnaturally  were  profoundly 
impressed  by  the  rapid  increase  of  wealth  due  to  competi- 
tion, —  or  rather  to  freedom  of  industry,  —  as  well  as 
by  the  irksomeness  of  the  old  gild  restrictions,  to  which 
appeals  were  being  made  by  those  who  wished  to  curb 
the  new  movement.  They  overlooked  the  evils  of  un- 
restricted freedom,  and  in  consideration  of  its  benefits 
concluded  that  the  State  should  not  try  to  guide  in- 
dustry, as  it  had  so  long  been  doing,  but  that  industry 
needed  only  to  be  left  alone  to  achieve  its  grandest  re- 
sults. It  will  be  necessary  later  to  note  some  of  the  results 
of  the  attempt  of  the  government  to  follow  this  principle. 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  47 

4.  Banking  and  Credit.  —  All  great  movements  are  com- 
plex, the  various  parts  being  mutually  cause  and  effect,  one 
of  another.     The  preceding  stage  had  developed  money ; 
the  industrial  stage  has  developed  credit.    Credit  has  been 
in  part  the  result,  as  it  has  been  in  part  a  cause,  of  the 
other  great  changes  which  characterize  the  age.     Money 
is  still  used  as  the  most  common  medium  in  retail  trade 
and  in  small  transactions  generally,  but  in  large  transac- 
tions it  has  been  displaced  in  great  measure  by  the  vari- 
ous instruments  of  credit,  such  as  checks,  drafts,  and  bills 
of  exchange.     Moreover,  to  secure  a  proper  organization 
of  credit,  it  has  been  necessary  for  society  to  develop  the 
system  of  banking  as  we  know  it  to-day.     Thus  one  great 
improvement  forms  others  and  is  in  turn  formed  by  them. 
In  1782  there  was  but  one  bank  in  the  United  States ;  in 
September,  1902,  the  national  banks  alone  numbered  4601, 
while  if  we  add  to  this  number  the  state  banks,  private 
banks,  and  trust  companies  which  perform  banking  func- 
tions, the  total  would  rise  to  over  12,000. 

5.  Transportation.  —  Before  the  beginning  of  the  indus- 
trial stage,  the  problem  of  moving  things  was  far  less  im- 
portant than  it  has  since  become.     Not  much  could  be 
moved  long  distances  by  land  while  only  packhorses  and 
wagons  were  known.     Often,  too,  the  roads  were  such  as 
prevented  the  best  results  even  from  such  a  mode  of  loco- 
motion.    Transportation  by  land  being  so  difficult,  com- 
merce depended  then,  as  always  before,  chiefly  upon  water. 
Sailing  vessels,  though  slow,  could  carry  even  bulky  com- 
modities between  places  connected  by  water,  and  large 
cities  were  therefore  always  seaports.     We  have  become 
more  independent  of  waterways  furnished  by  nature  or  by 
art.     Important  cities  can  now  grow  up  miles  away  from 


48          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

navigable  rivers  or  the  seacoast,  though  the  importance 
of  water  communication  even  to-day  is  attested  by  the 
slight  proportion  of  cities  that  are  so  situated.  In  all  this 
we  see  that  civilization  is  marked  by  man's  increasing 
domination  of  nature. 

6.  Moral  and  Legal  Restraints.  — Always  in  past  stages 
of  economic  development,  we  have  seen  a  sharp  distinction 
drawn  between  neighbors  and  strangers.  The  family  and 
neighbors  have  formed  a  constantly  widening  circle,  and 
have  always  been  protected  by  detailed  law  and  custom ; 
strangers  on  the  other  hand  were  exposed  to  whatever 
treatment  might  be  considered  advantageous.  Indeed,  the 
word  "  stranger  "  in  many  languages  even  had  the  added 
meaning  of  enemy.  It  is  characteristic  of  the  industrial 
stage  that  the  distinction  between  neighbor  and  stranger 
is  no  longer  a  clearly  defined  one.  It  may  be  asked,  Have 
all  men,  then,  become  brothers,  or  have  they  all  become 
strangers  and  enemies?  Few  will  claim  that  men  in  their 
business  dealings  are  brotherly.  Yet  if  we  look  at  the 
whole  of  the  industrial  stage,  we  shall  have  reasons  for 
believing  that  the  change  which  has  been  taking  place  has 
been  to  make  neighbors  of  those  who  were  strangers  and 
enemies.  The  great  and  sudden  widening  of  the  circle  of 
neighbors  was  naturally  accompanied  by  a  weakening  of 
the  feeling  of  neighborliness.  But  in  our  own  time  more 
than  ever  before  there  has  been  a  conscious  effort  to 
strengthen  this  feeling  of  neighborliness  or  brotherhood, 
and  to  widen  the  circle  even  beyond  national  lines. 
Humanity,  on  the  whole,  has  not  been  lessening  but 
growing. 


THE  INDUSTRIAL  STAGE  IN  ENGLAND  49 

II.    THE  INDUSTRIAL  REVOLUTION  IN  ENGLAND 

Economic  Conditions  in  1760.  — It  was  in  England  that 
the  change  from  the  handicraft  stage  to  the  industrial 
stage  first  began  and  was  most  rapidly  accomplished. 
The  change  is  generally  called  in  England  the  Industrial 
Revolution,  and  the  name  is  appropriate.  A  change  which 
takes  place  so  gradually  that  life  adjusts  itself  to  the  new 
conditions  without  great  loss  or  suffering,  —  a  change  like 
that  which  occurs  in  the  plant  that  is  always  growing,  yet 
seems  to  be  at  a  standstill,  —  such  a  change  we  call  a  de- 
velopment or  evolution.  But  a  change  which  comes  so 
rapidly  that  life  cannot  promptly  adjust  itself  to  the  new 
conditions,  a  change  that  breaks  down  the  old  order  with 
much  confusion  and  suffering,  —  this  we  call  a  revolu- 
tion. 

To  understand  the  English  Industrial  Revolution  aright, 
we  must  first  go  back  to  study  the  condition  of  things  just 
before  it  began. 

1.  Agriculture. — In  1760  immense  tracts  of  English 
land  were  still  held  as  "  common  "  land.  Seven  million 
acres  of  such  land  were  made  private  property  between 
1760  and  1843.  Upon  this  common  land  laborers  built 
their  cottages,  cultivating  little  patches  of  it  for  them- 
selves, and  pasturing  upon  the  rest  of  it  the  few  geese  or 
sheep  that  they  were  able  to  keep.  The  advantage  was 
that  the  laborers  were  somewhat  independent,  paying  no 
rent,  and  having  some  slight  means  of  support  besides 
their  wages.  The  great  disadvantage  was  that  most  of 
the  land  was  so  poorly  utilized  that  it  was  well  called 
"  waste  "  land.  What  was  every  one's  business  was  in  that 
case,  as  generally,  no  one's  business.  The  marshes  were 


50          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

undrained,  and  what  little  cultivation  was  practised  was 
primitive  and  poor,  and  therefore  wasteful  in  the  extreme. 
2.  Manufactures.  —  But  it  was  in  the  department  of 
manufactures  that  the  greatest  change  was  to  occur.  The 
system  of  hand  manufactures  was  still  general.  When 
Adam  Smith,  in  his  Wealth  of  Nations,  published  in  1776, 
wrote,  "A  man  grows  rich  by  employing  a  multitude  of 
manufacturers,"  he  was  using  the  word  manufacturers  in 
its  then  usual  sense,  to  denote  artisans  or  mechanics.  The 
principal  manufactures  were  woollen  goods,  which  Eng- 
land exported  in  1770  to  the  value  of  about  X4,000,000, 
that  being  nearly  a  third  of  her  total  export  trade. 
The  methods  of  manufacture  were  primitive.  In  the 
textile  industry,  for  instance,  the  "manufacturer"  had 
his  home,  his  cows,  his  horse,  and  his  poultry;  he 
bought  his  wool,  his  wife  spun  it  into  yarn,  and  together 
they  wove  it  and  sold  it  at  the  "fair,"  enjoying  all  the 
proceeds.  As  the  spinning  on  the  old  spinning-wheel 
was  done  one  thread  at  a  time,  it  followed  that  a 
weaver  with  a  hand-loom  could  work  up  the  yarn  more 
rapidly  than  it  could  be  spun.  Even  before  1760, 
however,  a  change  had  already  begun.  Cities  began  to 
attract  the  hand-workers.  The  inevitable  tendency  to 
divide  the  processes  of  manufacture  showed  itself.  The 
workers  found  it  difficult  to  attend  to  the  buying  of  the 
wool,  the  spinning,  the  weaving,  and  the  selling  of  the 
finished  goods.  So  the  processes  were  divided,  and  mid- 
dlemen appeared  who  bought  yarn  from  the  spinners  and 
sold  it  to  the  weavers.  Later  they  ceased  to  sell  the 
yarn,  but  furnished  it  to  the  weavers  on  contract,  keeping 
a  claim  upon  the  cloth,  and  paying  a  stipulated  sum  for 
the  weaving.  Thus  the  old  "manufacturer"  became  a 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  51 

workman,  a  wage-earner,  and  in  a  measure  dependent 
upon  the  capitalist  who  furnished  the  stock.  Many  of 
the  germs  of  the  factory  system  therefore  existed  as  early 
as  1760,  though  as  yet  the  work  was  generally  done  by 
hand  power  with  very  simple  implements. 

Next  in  importance  to  the  woollen  industry  was  that 
of  iron;  but  England  in  1737  imported  perhaps  twenty 
thousand  tons  of  iron,  or  more  than  she  herself  produced. 
After  1740  the  iron  trade  had  begun  to  fall  off  because 
supplies  of  charcoal  for  the  charcoal  smelting  of  the  time 
were  almost  exhausted.  Other  forms  of  manufacture, 
such  as  those  of  silk,  linen,  and  cotton,  had  hardly  begun. 

3.  Transportation.  —  Such  goods  as  were  manufactured 
could  be  moved  only  with  great  difficulty  and  at  great 
expense.     Transportation  facilities  were  very  backward. 
One  traveller  of  the  time,  who  speaks  of  the  highways  as 
"most  execrably  vile,"  tells  us  that  he  found  ruts  four 
feet  deep,  and  that  he  "  saw  three  carts  break  down  in  a 
mile  of   road."     Such  being  the  condition  of  the  roads, 
packhorses  were  still  the  common  means  of  transporting 
goods  to  and  from  market.    The  only  improvement  before 
1760  consisted  in  the  building  of  a  few  canals. 

4.  Economic  Legislation.  —  Of   all  the  conditions  that 
were  characteristic  of  the  time,  that  of  the  economic  legis- 
lation of   the  period  seems  most  strange  to  the  modern 
reader.     The  mediaeval   notion  of   government  was  still 
nominally  in   force.     In   general,  this   notion   was  that 
detailed  special  legislation  was  required  for  many  cases 
in  which  we  of  to-day  regard  general  laws  as  preferable. 
Thus  the  State  passed  many   laws  to  regulate  religion, 
agriculture,  manufactures,  and  commerce.     Some  of  these 
laws  require  our  special  attention  at  this  point.    We  have 


52          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

already  remarked  upon  the  fact  that  men  of  the  earlier 
days  did  not  believe  in  competition.  They  dreaded  the 
mischief  a  stranger  might  work,  coming  into  a  town  and 
carrying  on  trade  in  an  irregular  fashion.  So  they  passed 
in  England  a  law  known  as  the  Statute  of  Settlements,  which 
prescribed  that  no  man  could  carry  on  a  trade  unless  he 
was  a  citizen  of  the  city  and  a  member  of  the  trade  gild 
there.  It  also  provided  that  a  workman  coming  into  town 
must,  upon  the  demand  of  any  citizen  made  within  forty 
days  of  his  coming,  give  evidence  or  surety  guaranteeing 
the  town  for  one  year  against  his  becoming  a  charge  upon 
the  taxes  for  the  relief  of  the  poor.  Since  few  could  fur- 
nish such  a  guarantee,  the  law  was  a  very  serious  obstacle 
to  freedom  of  movement.  By  another  law  it  was  pre- 
scribed that  one  could  become  a  member  of  a  trade  gild 
only  after  seven  years  of  apprenticeship,  and  only  in  a 
specially  prescribed  manner.  Moreover,  there  were  other 
regulations  limiting  the  number  of  apprentices.  The  pur- 
pose of  such  regulations  was  to  protect  the  various  trades 
from  overcrowding  and  from  irregular  methods.  It  must 
be  remembered  that  at  the  time  when  such  regulations 
grew  up  competition  in  the  modern  sense  was  an  impossi- 
bility, and  nothing  but  such  customary  or  legal  restric- 
tions could  avail  to  guard  the  true  interests  of  the 
individual  and  society. 

Wages.  —  Perhaps  the  most  striking  of  all  the  eco- 
nomic legislation  of  the  time  was  the  law  which  left  to 
Justices  of  the  Peace  the  work  of  fixing  the  wages  of 
workmen.  In  explanation  of  the  law  it  was  often  held 
that  workmen  would  be  oppressed  if  left  to  the  mercy  of 
employers ;  but  the  real  purpose  of  the  law  seems  rather 
to  have  been  to  protect  the  employer  against  high  wages, 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  53 

and  the  spirit  of  the  administration  of  the  law  seems  to 
have  conformed  to  that  purpose.  Inasmuch  as  the  work- 
men were  thus  "  protected  "  by  law  in  the  matter  of  their 
wages,  combinations  among  them  were  held  unnecessary 
and  dangerous,  and  were  therefore  strictly  forbidden. 

5.  The  Condition  of  Thought  in  1760.  —  We  should  fail 
to  understand  the  Industrial  Revolution  were  we  to  con- 
fine our  attention  to  the  economic  life.  In  1760  there 
had  recently  begun  a  tremendous  revolt  against  the  whole 
system  of  legislation  and  government  that  we  have  de- 
scribed. But  it  would  be  a  mistake  to  suppose  that  this 
revolt,  which  eventually  carried  everything  before  it, 
showed  itself  only  in  the  field  of  industry.  Indeed,  the 
restrictions  which  aroused  the  greatest  opposition  were 
those  upon  conscience  and  religious  worship.  Next  to 
religious  liberty  political  liberty  was  the  desire  of  all 
Englishmen.  While  restrictions  upon  trade  were  ac- 
cepted without  vigorous  protest,  the  passion  for  personal 
liberty  worked  itself  up  to  a  fanaticism. 

Under  the  influence  of  this  spirit  of  protest,  Adam 
Smith  wrote,  and  in  1776  published,  his  Wealth  of 
Nations,  the  most  influential  book  on  economics  that 
has  ever  been  written.  Men  —  so  runs  his  argument  — 
are  by  nature  free  and  equal.  Inequalities  are  of  man's 
making,  and  are  to  be  avoided.  Leave  men  alone  and 
equality  will  reassert  itself.  What  men  need  in  their 
business  is  not  protection  but  liberty.  Under  a  system 
of  free  competition  each  man  will  seek  his  own  interest, 
and,  in  seeking  his  own  interest,  will  promote,  as  a  rule, 
the  best  interests  of  society  as  well.  If  the  result  is  not 
the  best  that  is  ideally  conceivable,  it  is  at  least  the  best 
that  is  practically  possible,  and  is  certainly  better,  thought 


54          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Smith,  than  can  result  from  any  interference  of  govern- 
ment. 

Such  was  the  temper  of  the  age ;  so  universal  was 
the  impatience  with  restraint,  even  the  most  wholesome ; 
and  so  mischievous  and  shackling  was  much  of  the  exist- 
ing economic  legislation,  that  the  Wealth  of  Nations  was 
soon  elevated  to  the  rank  of  an  economic  gospel,  and,  fol- 
lowed as  it  was  by  other  great  works  of  similar  character, 
it  inspired  the  economic  policy  of  the  greater  part  of  the 
nineteenth  century.  We  shall  note  later  the  results  of 
the  adoption  of  that  policy. 

The  Changes  and  their  Result. — 1.  Changes  in  Agri- 
culture. —  During  the  eighteenth  century  there  were  great 
changes  in  English  agriculture.  High  prices  made  pos- 
sible more  intensive  farming,  and  with  this  greater  appli- 
cation of  capital,  radical  improvements  in  farming  methods 
were  developed.  As  a  result  of  these  changes,  large  farms 
supplanted  the  small  ones.  Also,  the  social  and  political 
prestige  attaching  to  landownership  tended  to  concentrate 
the  ownership  of  farms  into  fewer  hands.  Thus  these 
and  other  forces,  which  we  need  not  stop  to  explain, 
rapidly  dispossessed  and  drove  away  from  the  country 
districts  multitudes  of  poor  people  whose  only  chance  for 
a  living  now  lay  in  moving  to  the  growing  towns  and 
adding  themselves  to  the  increasing  numbers  of  the 
"  factory  "  population. 

2.  Changes  in  Manufacture. — In  1769,  while  Adam 
Smith  was  writing  the  book  which  was  to  exert  so  pro- 
found an  influence  upon  the  economic  thought  of  the 
future,  a  friend  of  his,  James  Watt  by  name,  was  prepar- 
ing the  way  for  a  revolution  of  the  world's  industry  by 
the  invention  of  the  steam-engine.  When  the  "  society 


THE  INDUSTRIAL  STAGE  IN  ENGLAND  55 

of  hammermen  "  of  Glasgow  refused  to  let  Watt  work  at 
his  trade  there  because  he  was  not  a  member  of  their  gild, 
permission  was  secured  for  him  to  set  up  his  shop  on  the 
University  grounds,  outside  the  city's  jurisdiction,  and 
thus  two  of  the  greatest  forces  that  created  the  Industrial 
Revolution  were  born  close  together  in  the  shelter  of  a 
school  of  learning. 

In  the  same  year,  too,  there  began  a  series  of  inventions 
which,  during  the  next  fifty  years,  completely  revolution- 
ized the  textile  industry,  and  gave  cotton  manufacture, 
instead  of  the  manufacture  of  woollens,  the  first  place  in 
English  industry.  The  invention  of  the  spinning-jenny 
made  possible  a  vast  increase  in  the  production  of  yarn 
for  weaving,  and  since  better  goods  could  now  be  pro- 
duced at  a  lower  price  than  before,  the  demand  for  the 
goods  was  much  increased,  and  weavers,  still  using  the 
old  hand-loom,  were  kept  busy  at  higher  wages  than  they 
had  before  received.  But  within  a  few  years  the  power- 
loom  for  weaving  had  been  invented  and  improved,  and 
many  of  the  weavers  found  themselves  out  of  employ- 
ment. As  it  was  possible  for  a  single  person  to  tend  four 
power-looms,  three  out  of  four  of  the  workmen  were 
thrown  out  of  a  job  until  the  increased  demand  for  the 
finished  goods  should  increase  the  number  of  looms. 
Moreover,  as  weaving  by  the  power-looms  required  deft- 
ness rather  than  strength,  women  and  children  came  to 
be  employed  instead  of  men,  because  they  could  be  hired 
at  lower  wages.  Just  at  the  close  of  the  century  the  cot- 
ton industry  was  still  further  stimulated  by  Eli  Whitney's 
invention  of  the  cotton  gin  for  mechanically  clearing 
cotton  of  its  seeds. 

At  the  same  time  steam  was  rapidly  taking  the  place 


56          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

of  water  power  in  manufacturing.  The  greatest  change 
was  wrought  in  the  cotton-manufacturing  industry,  which 
since  the  introduction  of  steam  has  held  one  of  the  fore- 
most places  in  English  economic  life  ;  but  similar  results 
attended  changes  in  the  manufacture  of  woollen,  linen,  and 
silk  goods. 

By  the  invention  of  the  steam-engine,  the  output  of 
English  coal  mines  was  vastly  increased,  since  shafts  could 
now  be  sunk  deeper  and  the  mines  kept  free  from  water. 
With  increased  supplies  of  coal,  iron  could  be  worked  by 
the  blast  furnace,  instead  of  by  the  old  process  of  charcoal 
smelting,  and  the  iron  trade  was  therefore  quickly  revo- 
lutionized. The  importance  of  this  change  may  be  under- 
stood when  we  remember  that  under  modern  conditions 
of  industry  those  nations  that  surpass  in  the  production 
and  manufacture  of  iron  and  steel  for  their  machinery 
hold  the  leadership  of  the  world's  trade. 

3.  Changes  in  Transportation.  —  The  great  change  in 
methods  of  farming  and  manufacturing  naturally  gave  a 
new  stimulus  to  the  development  of  improved  transpor- 
tation facilities.  The  public  highways  were  greatly  im- 
proved under  the  direction  of  such  engineers  as  Telford 
and  Macadam,  from  whom  our  best  methods  of  road  con- 
struction have  taken  their  names.  New  and  longer  canals 
were  dug,  and  the  movement  would  have  gone  much 
farther  had  it  not  been  checked  after  1825  by  the  devel- 
opment of  the  system  of  steam  railways.  Even  before 
1825,  when  the  first  railway  was  opened,  steam  had  for 
some  years  been  successfully  applied  to  water  transporta- 
tion. Within  a  half-century,  England  became  one  vast 
network  of  railways,  and  it  became  possible  to  transport 
the  bulkiest  commodities  from  one  end  of  the  kingdom  to 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  57 

the  other  more  cheaply  than  they  had  been  moved  from 
one  county  to  another  with  the  old  means  of  transport. 
Wheat  can  now  be  carried  from  our  Western  grain  fields 
and  laid  down  in  the  English  markets  more  cheaply  than 
it  could  be  moved  an  average  distance  of  from  thirty  to 
forty  miles  in  the  England  of  1760. 

4.  Changes  in  Economic  Legislation.  — With  the  passing 
of  the  old  industrial  methods  came  the  demand  for  free- 
dom from  the  old  and  vexatious  restrictions.  Whatever 
might  have  been  said  in  justification  of  such  restrictions 
in  earlier  days,  the  time  for  them  had  now  passed,  and 
they  were  destined  to  go. 

The  old  laws  were,  of  course,  not  repealed  in  a  body. 
Such  a  thing  never  happens  in  England,  and  it  is  a  rare 
occurrence  in  any  country.  Some  laws  were  repealed, 
and  some  simply  died.  Thus,  the  law  requiring  seven 
years'  apprenticeship  before  one  could  enter  certain  trades 
died  during  the  latter  part  of  the  eighteenth  century. 
Years  afterward,  at  the  beginning  of  the  nineteenth  cen- 
tury, in  the  labor  troubles  of  the  time,  some  workmen  in 
desperation  turned  back  to  the  old  law  and  prosecuted 
employers  for  violating  it.  The  result  was  that  the  law 
was  at  first  suspended  and  later  repealed  as  being  plainly 
ill  adapted  to  the  new  conditions  of  industry.  Thus,  lit- 
tle by  little,  the  old  laws  were  repealed  or  forgotten,  and 
men  were  left  free  to  bargain  and  manufacture  as  they 
pleased. 

Labor  Laws.  —  Of  the  many  laws  regulating  labor,  it 
must  be  remembered  that  they  were  designed  not  so  much 
to  help  the  workmen  as  to  check  their  growing  power  and 
aspirations.  When  Adam  Smith  declaims  against  labor 
laws,  he  has  in  mind  laws  aimed  against  labor,  not  laws 


68          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

like  those  of  modern  times  which  have  been  designed  to 
benefit  the  laborer.  Indeed,  he  says  in  one  place  that  if 
any  law  chanced  to  be  beneficial  to  labor,  it  was  sure  to  be 
a  just  law.  A  striking  instance  of  the  unfairness  of  the 
old  labor  laws  is  seen  in  the  case  of  the  statutes  against 
combinations.  Although  from  the  first  capitalists  were 
allowed  to  combine,  workmen  were  forbidden  to  do  so 
under  severe  penalties.  Even  after  the  laws  bearing  on 
apprenticeship,  regulation  of  wages,  and  inspection  of 
goods  had  been  repealed  or  had  lapsed,  this  law  against 
workmen's  combinations  continued  operative,  and  under 
it  men  who  attempted  to  form  labor-unions  were  at  times 
severely  punished.  But  eventually  this  law  also  was 
repealed. 

Results  of  the  Changes.  —  1.  Industrial  Disturbance. 
The  results  of  the  great  changes  that  constituted  the 
Industrial  Revolution  have  been  startling.  The  area  of 
the  markets  for  various  commodities  was  marvellously 
widened,  and  distance  from  the  consumer  no  longer 
weighed  heavily  in  the  mind  of  the  manufacturer  in 
determining  the  location  of  his  plant.  The  balance  of 
convenience  rather  inclined  toward  concentrating  indus- 
tries in  those  places  where  they  could  be  carried  on  to 
special  advantage.  Thus,  there  was  first  a  concentra- 
tion of  industries  near  favorable  water  power,  and  later, 
in  some  cases,  near  facilities  for  the  production  of  steam 
power.  This  change  took  place  usually  not  by  the  re- 
moval of  old  plants  and  industries  to  new  localities,  but 
by  the  growth  in  favorable  centres  of  such  powerful  rivals 
that  the  scattered  factories  were  gradually  forced  to  go 
out  of  business.  Thus,  not  only  were  country  artisans 
forced  out  of  employment,  but  even  certain  towns  were 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  59 

sacrificed  to  others  that  enjoyed  a  more  favorable  situa- 
tion. 

2.  Growth  of  Cities.  — Another  important  result  of  the 
changes  in  the  methods  of  industry,  and  particularly  of 
the  changes  in  the  methods  of  transportation,  was  the 
growth  of  cities.     While  concentration  of  population  has 
had  many  beneficent  results,  and  promises  still  others  in 
the  future,  the  evils  connected  with  such  aggregations  of 
people  have  formed  one  of  the  most  serious  problems  that 
our  generation  has  to  face. 

3.  Fluctuations  in  Trade.  —  One  cause  of  the  compara- 
tive simplicity  of  the  old  and  slow-going  system  of  manu- 
facture and  trade  was  its  great  regularity.     One  year  was 
much  like  another.     Producers  could  calculate  the  amount 
of  their  product  that  would  be  required,  and  could  calcu- 
late also  what  would  be  the  return  to  their  labor.     With 
the  growth  of  national  and  international   markets  came 
increasing  complexity  of  wants  and  increasing  fickleness 
of  fashion.     It  was  no  longer  easy  to  know  what  things 
would  be  wanted  or  in  what  quantities  goods  would  be 
taken  by  consumers  when  produced.     A  period  of  over- 
cautious production  would  lead  to  unduly  high   prices. 
New  capital  would  be  tempted  by  the  profits,  and  the  old 
manufacturers  would  forget  their  caution.     Then  would 
come  a  glut,  prices  would  fall  disastrously,  factories  would 
be  closed,  and  workmen  would  be  thrown  out  of  employ- 
ment.    But  depriving  a  large  section  of  the  consuming 
public  of  its  purchasing  power  —  its  wages  —  is   not  an 
ideal  method  of  reviving  industry.     Thus  times  of  plenty 
for  the  workmen  would  be  succeeded  by  times  of  great 
want,  with  all  the  evil  results  upon  character  that  uncer- 
tainty of  life  and  work  can  produce. 


60          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Reaction  against  the  Passive  Policy  of  Government. — We 
have  already  explained  that  accompanying  the  change  in 
industrial  methods  went  a  radical  change  in  opinion  as 
to  the  proper  attitude  of  the  State  toward  human  affairs, 
including  industrial  affairs.  This  change  was  in  part  due 
to  a  feeling  that  men  had  really  become  so  intelligent  and 
reasonable  and  just  that  they  would  know  and  respect  one 
another's  rights.  But  the  chief  reason  for  the  change  was 
the  general  acceptance  of  Adam  Smith's  central  doctrine 
that  self-interest  will  regulate  men's  actions  for  the  gen- 
eral good  more  nearly  and  more  surely  than  can  any 
statutes  framed  by  man.  We  have  now  to  study  in  detail 
some  of  the  points  in  which  this  theory  of  governmental 
passivity  has  broken  down  under  the  test  of  experience, 
and  some  of  the  changes  that  men  have  found  themselves 
compelled  to  make  in  consequence. 

1.  Government  Inspection  of  Groods.  —  In  repealing  the 
old  laws  for  the  inspection  of  wares,  it  was  claimed  that 
under  the  free  play  of  self-interest  in  competition,  cheat- 
ing would  not  pay  and  would  therefore  cure  itself.  Need- 
less to  say,  these  hopes  were  never  realized.  Men  might 
perhaps  be  safely  left  to  pursue  their  own  interest  in 
buying  goods  if  they  knew  enough  to  do  so,  but  they  do 
not.  Indeed,  it  was  far  easier  for  one  to  assure  himself 
of  the  quality  of  his  purchases  in  the  old  days  when  the 
goods  were  of  less  variety,  were  more  simple  in  their 
character,  and  were  made  by  craftsmen  who  were  not 
remote  from  the  purchaser.  But  who  in  our  day  can  tell 
the  quality  of  baking-powder,  of  ground  spices,  or  of  a 
thousand  and  one  things  that  are  subject  to  adulteration  ? 
How  many  can  distinguish  butter  from  oleomargarine  ? 
How  many  can  detect  fever  germs  in  water  or  trichinae  in 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  61 

pork  ?  For  all  these  and  many  other  things  the  ordinary 
buyer's  knowledge  is  worthless  :  an  expert  must  be  em- 
ployed. Such  has  been  the  experience  of  the  English 
people,  and  the  law  now  provides  for  the  inspection  by 
government  experts  of  meat  and  fish,  groceries,  drugs, 
butter,  and  other  articles  of  food.  Gold  plate  and  silver 
plate,  gun  barrels,  steam  boilers,  drains  and  sewers,  gas, 
weights  and  measures, — all  these  are  tested  on  the  same 
general  principle  that  the  government  through  experts 
must  guard  the  people  from  those  serious  dangers  against 
which  they  cannot  or  habitually  do  not  protect  themselves. 
In  reality,  men  do  of  course  in  this  case  protect  them- 
selves, but  they  do  so  through  their  government,  which 
represents  their  cooperative  effort,  rather  than  each  man 
for  himself.  For  every  man  to  attempt  to  do  everything 
directly  for  himself  would  be  to  return  to  barbarism. 
Division  of  labor  and  cooperation  are  causes  and  signs  of 
advancing  civilization. 

2.  Governmental  Protection  of  Labor. — Nowhere  was 
freedom  more  absolutely  demanded  at  the  time  of  the 
Industrial  Revolution  than  for  labor,  and  nowhere  was  it 
more  needed.  The  old  restrictions  were  galling  and  bur- 
densome alike  to  masters  and  men.  But  what  of  the 
freedom  that  took  their  place?  When  machinery  was 
introduced,  it  became  possible  to  employ  women  and 
children  in  work  that  had  formerly  required  the  labor 
of  men.  But  modern  machinery  is  as  destructive  of  life 
as  a  cannon  is,  if  human  life  gets  in  its  way  ;  and  the 
destruction  of  life  and  limb  in  the  early  days  of  machinery 
was  appalling.  Here  again  it  had  been  ingeniously  argued 
that  self-interest  would  lead  employers  to  protect  their 
employees  from  injury  of  every  kind.  The  basis  of  the 


62          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

argument  was  of  course  the  assumption  that  such  protec- 
tion would  be  to  the  benefit  of  the  employers.  But  this 
assumption  is  not  valid. 

So  scandalous  was  the  neglect  of  the  early  manufac- 
turers that  a  reaction  set  in  against  the  old  license,  and 
laws  were  passed  requiring  under  heavy  penalties  what 
the  simplest  dictates  of  humanity  ought  to  have  secured 
and  would  have  secured  if  men  had  been  fit  to  be  left  to 
unregulated  competition.  The  employment  of  children 
four  and  five  years  of  age,  the  bad  ventilation  of  factories, 
working  over  hours,  neglect  of  education  of  children,  and 
many  other  evils,  called  for  a  like  interference.  Indeed, 
it  would  be  hard  to  mention  a  point  in  which  employers 
could  neglect  the  interests  of  their  employees  and  yet  did 
not  do  so. 

The  result  of  a  public  recognition  of  these  evils  was  a 
series  of  Acts  of  Parliament,  known  as  the  Factory  Acts, 
beginning  with  that  of  1802  and  running  down  to  the 
present  time.  Laws  now  in  force  provide,  among  other 
things,  for :  (1)  the  fencing  in  of  all  dangerous  machin- 
ery ;  (2)  ventilation  and  other  sanitary  conditions  in 
factories  ;  (3)  a  working  day  for  women  and  children  for 
most  industries  of  not  over  ten  hours  ;  (4)  a  Saturday 
half -holiday  ;  (5)  prohibition  of  employment  of  any  per- 
sons under  eleven  years  of  age,  —  or  of  persons  under 
sixteen,  unless  they  present  a  certificate  of  fitness ; 
(6)  schooling  for  children  half  of  each  day  or  full  hours 
on  alternate  days ;  (7)  the  keeping  of  a  register  by 
employers  in  which  they  must  enter  all  to  whom  they  give 
out  work,  thus  giving  opportunity  to  inspectors  to  inspect 
the  places  where  such  work  is  done ;  (8)  government 
inspectors  to  see  to  the  enforcement  of  the  law.  This 


THE  INDUSTRIAL  STAGE  IN  ENGLAND  63 

last  provision  has  been  found  by  experience  to  be  one 
without  which  the  rest  of  the  legislation  might  as  well 
not  have  been  passed.  In  contrast  with  the  provision 
which  limits  the  work  of  women  and  children  to  not  more 
than  ten  hours  per  day,  place  the  old  law  of  apprentice- 
ship by  which  a  boy  must  work  at  least  from  five  in  the 
morning  till  between  seven  and  eight  at  night,  with  time 
off  for  meals.  The  change  is  significant  as  showing  that 
whereas  the  old  laws  were  framed  in  the  interest  of 
employers,  modern  ones  have  been  designed  in  the  inter- 
est of  employees,  or,  to  consider  it  more  broadly,  in  the 
permanent  interest  of  the  people  as  a  whole. 

3.  Trade-unions  and  the  Government.  —  As  the  wage 
system  developed  during  the  Industrial  Revolution  there 
was  a  natural  tendency  for  the  wage-earners  to  group 
themselves  by  trades  into  unions  for  the  protection  of 
their  interests.  So  jealous  were  the  ruling  classes,  and 
so  fearful  lest  the  lower  classes,  who  greatly  outnumbered 
them,  might  by  combining  abate  their  power,  that  they 
had  passed  laws  against  such  combinations  at  intervals 
ever  since  1360.  Hence,  when  the  wage-earners  found 
the  need  of  union  rapidly  increasing,  they  were  driven  to 
secret  organization  for  lack  of  the  open  methods  which 
were  denied  them.  In  1800  Parliament,  finding  that  in 
spite  of  the  law  unions  were  steadily  gaining  in  strength 
and  numbers,  passed  a  comprehensive  law  to  suppress 
them,  even  declaring  illegal  "all  agreements  between 
journeymen  and  workmen  for  obtaining  advances  of  wages, 
reduction  of  hours  of  labor,  or  any  other  changes  in  the 
conditions  of  work." 

So  odious  did  this  law  become  that  employers  some- 
times voluntarily  pledged  themselves  not  to  have  recourse 


64          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

to  it.  In  1824,  after  prolonged  agitation,  Parliament  con- 
fessed the  law  a  mistake,  and  at  the  same  time  repealed 
earlier  laws  relating  to  combinations  of  workmen.  Thus 
freed  from  outlawry,  trade-unions  grew  at  an  astounding 
rate.  But  they  were  still  subject  to  legal  persecution  of 
one  sort  and  another.  Especially  did  they  suffer  at  the 
hands  of  the  courts  from  adverse  decisions,  which  declared 
their  united  efforts  to  advance  their  interests  conspiracies 
"in  restraint  of  trade."  Finally,  in  1875,  a  law  was 
passed  which  expressly  declared  that  the  purposes  and 
actions  of  trade-unions  were  not  to  be  held  unlawful  on 
the  ground  that  they  were  in  restraint  of  trade,  and  in  the 
second  place,  that  acts  which  are  lawful  when  done  by 
one  person  shall  be  held  lawful  even  when  done  by  two 
or  more  conjointly,  if  such  acts  are  in  furtherance  of  an 
object  sought  through  a  trade  dispute. 

Conclusion.  —  We  have  pointed  out  a  few  of  the  many 
ways  in  which  the  new  theory  failed  to  justify  itself  when 
applied  to  the  new  economic  power.  The  new  power  was 
that  which  created  the  revolution.  The  new  theory  was 
that  which  asserted  the  universal  efficacy  and  beneficence 
of  unrestrained  industrial  freedom,  or  unregulated  com- 
petition. The  theory  and  the  power  were  alike  strange 
to  men.  The  new  theory  promised  an  immense  increase 
in  the  product  of  national  industry  and  a  just  distribution 
of  the  product  among  those  who  contributed  to  its  making. 
An  immense  increase  of  product  there  was,  though  this 
was  due  to  invention  as  well  as  to  competition.  But  the 
theory  failed  to  fulfil  its  promise  as  to  the  distribution  of 
the  new  wealth.  Not  until  benevolence  was  formulated 
and  enforced  by  legislation  was  the  situation  in  this 
respect  endurable.  The  reaction  against  the  theory  was 


THE  INDUSTRIAL   STAGE  IN  ENGLAND  65 

not  sudden,  nor  was  it  a  conscious  and  definite  revolt  at 
all.  The  essentially  practical  and  concrete  habit  of  mind 
of  the  English  people  has  become  proverbial.  They  had 
been  driven  into  the  temporary  acceptance  of  unregulated 
competition  by  the  great  changes  in  industry.  When 
weakness  in  the  action  of  that  principle  became  manifest, 
they  simply  changed  its  action  little  by  little  by  applying 
the  regulative  power  of  government.  And  when  the 
nineteenth  century  had  passed,  it  was  found  that  the  good 
in  the  competitive  principle  had  been  retained,  while  the 
principle  in  its  universal  form  had  ceased  to  command 
assent.  When,  therefore,  we  hear  the  principle  of  a  "  fair 
field  and  no  favor  "  and  "  no  state  intervention  "  advocated 
by  a  man  strong  in  the  consciousness  of  personal  advan- 
tages, —  for  such  he  is  likely  to  be,  —  we  may  know  that 
he  is  a  full  century  behind  his  time,  and  that  he  has  not 
read  or  has  not  profited  by  one  of  the  most  impressive 
chapters  of  human  history.  For  the  English  nation  to- 
day, after  a  fair  trial  of  free  competition  without  govern- 
ment interference,  has  undeniably  returned  to  the  principle 
of  governmental  activity  which  she  sought  to  abandon. 
Bitter  experience  has  taught  her  that  it  is  among  the  true 
functions  of  the  State  to  protect  its  citizens  and  to  further 
their  material  and  social  well-being  by  every  law  and 
every  activity  which  can  contribute  to  that  end. 

SUMMARY 

1.  In  the  industrial  stage  men  make  things  by  machinery.      The 

result  is  separation  of  classes,  keen  competition,  a  development 
of  money  and  credit,  and  improved  facilities  for  transportation. 

2.  In  1760  agriculture  was  still  primitive,  manufacture  •was  in  the 

handicraft  stage,  and  there  was  much  restrictive  legislation. 

3.  After  1760  there  was  a  revolution  in  the  system  of  landholding 


66          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

and  landworking,  transportation  was  revolutionized,  and  the 
factory  system  was  developed. 

4.  The  Industrial  Revolution  produced  great  social  confusion,  im- 

moral competition,  and  violent  fluctuations  in  trade. 

5.  A  reaction  against  the  old  absence  of  restraint  has  made  itself 

increasingly  manifest  in  the  years  that  have  followed. 

QUESTIONS 

1.  Characterize  the  three  phases  of  the  industrial  stage. 

2.  How  was  production  carried  on  before  1760?    What  was  the 

nature  of  the  markets? 

3.  What  changes  in  social  organization  resulted  from  the  Industrial 

Revolution  ? 

4.  Describe  the  struggle  of  labor-unions  for  existence  and  for  legal 

recognition. 

5.  Who  was  Adam  Smith  ?    What  was  his  significance  as  a  voice  of 

the  time? 

6.  Discuss  the  question  of  the  passive  policy  of  government. 

LITERATURE 

Cunningham,  W. :    The  Growth  of  English  Industry  and  Commerce, 

Vol.  II,  Bk.  VIII,  Part  II. 

Gibbins,  H.  deB. :  Industry  in  England,  p.  204  (revised  edition). 
Hobson,  J.  A. :  The  Evolution  of  Modern  Capitalism,  Chs.  II  and  IV. 
Hutchins,  B.  L.,  and  Harrison,  A. :  A  History  of  Factory  Legislation 

(hi  England). 
Price,  L.  L. :  A    Short   History   of  English    Commerce  and  Industry, 

pp.  184-192  ;  192-201 ;  210-217. 
Report  of  the  United  States  Industrial  Commission,  Vol.  XVI,  on 

Foreign  Labor  Laws. 

Toynbee,  Arnold :  The  Industrial  Revolution,  Ch.  IV,  pp.  46-57. 
Webb,  Beatrice  (Potter)  :  The  Case  for  the  Factory  Acts. 


CHAPTER  IV 
THE  INDUSTRIAL  STAGE  IN  THE  UNITED  STATES 

I.    THE  INDUSTRIAL  REVOLUTION  IN  THE  UNITED 
STATES  AND  ENGLAND  CONTRASTED 

THE  story  of  the  Industrial  Revolution  and  of  the  in- 
dustrial stage  in  England  is  in  great  part  the  story  of  the 
revolution  and  the  stage  in  all  countries  that  have  gone 
through  it.  In  studying  the  economic  history  of  the 
United  States  for  the  same  period,  it  is  therefore  unneces- 
sary that  we  should  enter  again  into  all  the  details  that 
go  to  make  up  the  great  movement.  But  as  no  two  coun- 
tries have  the  same  racial  and  physical  peculiarities,  so  no 
two  countries  are  affected  in  precisely  the  same  way  by 
great  industrial  changes.  The  economic  history  of  the 
United  States  is,  in  part,  the  history  of  the  attempt  to 
apply  the  principles  of  free  competition  and  a  minimum  of 
State  interference  to  a  new  country  instead  of  to  an  old 
one,  as  was  the  case  with  the  English  experiment.  This 
difference  is  so  great  as  to  have  modified  the  result  mate- 
rially, and  it  will  therefore  be  profitable  to  study  more 
particularly  these  differences. 

The  principle  of  non-intervention  was  adopted  in  our 
own  country  even  more  fully  than  in  England,  where  the 
State  has  never  ceased  to  exercise  a  close  supervision  and 
control  over  religion.  In  some  respects  the  results  in  the 

67 


68          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

two  countries  have  been  parallel,  in  others,  not.  At  first 
sight  it  may  seem  that  American  experience  does  not  so 
sharply  condemn  the  passive  policy  of  government  as  does 
that  of  England,  and  the  question  may  be  asked  whether 
our  conclusion  from  the  history  of  English  industrialism 
was  after  all  correct  ?  Which  of  the  two  countries  has 
given  the  principle  of  unregulated  competition  the  fairer 
test? 

It  will  be  remembered  that  the  suffering  which  attended 
the  Industrial  Revolution  in  England  was  of  two  kinds 
and  from  two  different  sources.  One  was  due  to  the 
rapidity  and  the  magnitude  of  the  industrial  change,  and 
was  inherent  in  the  change  ;  the  other  was  due,  not  to  the 
change,  but  to  the  manner  in  which  the  change  was 
effected,  and  to  the  system  under  which  the  new  industry 
was  carried  on.  In  other  words,  one  was  due  to  change, 
the  other  to  unregulated  competition.  It  is  necessary  to 
keep  these  two  causes  distinct,  if  we  are  to  reach  a  just 
conclusion  regarding  the  influence  of  unrestrained  com- 
petition upon  industrial  life. 

1.  Comparative  Difficulty  of  Transition.  —  We  have 
already  seen  how  difficult  was  the  transition  from  the  old 
to  the  new  order  in  England.  In  our  own  country,  the 
difficulty  was  slight,  or  perhaps  we  might  more  properly 
say  that  there  was  no  transition,  since,  when  the  Industrial 
Revolution  began,  there  was  in  America  almost  no  manu- 
facturing at  all.  Our  industries  were  scarcely  started  when 
the  spinning-jenny,  the  power-loom,  and  the  steam-engine 
were  introduced,  and  so  almost  from  the  beginning  the 
factory  system  seemed  the  natural  one.  Such  change  as 
there  was  from  hand  industries  to  power  manufacture  pro- 
duced results  similar  to  those  witnessed  in  England  ;  but 


THE  INDUSTRIAL   STAGE  IN  THE  UNITED  STATES      69 

the  change  with  us  was  so  insignificant  in  extent  as 
scarcely  to  attract  public  attention.  Moreover,  artisans 
who  were  thrown  out  of  work  had  greater  opportunities, 
and,  on  account  of  the  less  fixed  conditions  of  life,  were 
more  ready,  to  get  new  employment  in  the  growing  indus- 
tries of  the  time.  Thus,  the  change  which  in  England 
was  a  revolution  was  in  America  an  evolution,  a  process  of 
construction  with  little  destruction,  since  there  was  little 
to  destroy. 

2.  Comparative  Difficulty  in  Operation  of  Competition. 
—  Under  the  system  of  unrestrained  competition,  the 
English  workmen  played  a  continually  losing  game  ;  such 
was  not  the  case  with  their  American  cousins.  Just  as 
the  littleness  of  our  industries  at  the  beginning  of  the 
Industrial  Revolution  mitigated  the  sufferings  from  the 
change,  so  the  greatness  of  our  territory  mitigated  the  suf- 
ferings from  the  system  of  competition.  The  average 
American  does  not  adequately  realize  the  difference 
between  Americans  and  Europeans  in  their  readiness  to 
move  about  from  place  to  place.  A  comparison  of  census 
figures  of  our  country  with  those  of  European  countries 
shows  that  with  them  the  proportion  of  persons  living  in 
town  or  county  other  than  that  of  their  birth  is  slight, 
while  with  us  it  is  very  great.  Thus  the  census  of  1880 
disclosed  the  fact  that  only  one-half  of  the  native-born 
inhabitants  of  the  country  were  living  in  the  county  of 
their  birth,  and  this  despite  the  fact  that  a  large  propor- 
tion of  the  total  population  is  made  up  of  children,  who,  of 
course,  would  generally  be  living  in  the  county  of  birth. 
Similarly,  the  census  of  1900  shows  that  nearly  thirty-two 
per  cent  of  the  total  population  of  the  country  are  living 
in  states  other  than  those  of  their  birth,  a  proportion 


70          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

which  has  remained  nearly  constant  for  several  decades. 
Throughout  our  history,  up  to'recent  years,  the  American 
workman  has  always  been  able  to  secure  cheap  or  even 
free  land  where  he  could  earn  an  independent  living. 
Under  these  two  conditions  of  ready  migration  and  easy 
access  to  independent  proprietorship,  it  was  impossible  for 
the  downward  pressure  of  competition  to  work  out  such 
results  in  manufacturing  industry  as  were  inherent  in 
the  system  itself,  and  such  as  must  show  themselves 
when  no  counteracting  influence  is  opposed.  Indeed,  we 
may  say  that  competition  in  America  was  regulated  from 
the  beginning,  not  by  legislation,  but  by  those  great  in- 
dustrial forces  and  opportunities  which  we  have  just  men- 
tioned. 

But  this  influence  cannot  be  exerted  forever.  Our  ter- 
ritorial resources,  great  as  they  are,  have  their  limits,  and 
it  is  usually  agreed  that  the  American  "  frontier  "  has  now 
disappeared.  Indeed,  it  is  probable  that  we  have  already 
reached  the  parting  of  the  ways,  and  that  henceforth  our 
reliance  must  be  placed  upon  some  other  agency  than  the 
free  bounty  of  nature.  As  free  land  has  become  less  and 
less  abundant,  the  wage-earners  of  the  East  have  had 
forced  upon  them  conditions  of  life  which  have  kept  down, 
although  they  have  not  absolutely  lowered,  their  stand- 
ard of  life.  Extremes  of  wealth  and  alienation  of  social 
classes  have  become  so  great  as  to  arouse  the  apprehension 
of  all  thoughtful  men.  Labor  riots  that  call  for  military 
interference  testify  to  the  fact  that  we  have  not  escaped, 
that  in  the  future  we  can  hope  less  and  less  to  escape,  the 
friction  that  accompanies  all  unfraternal  relations  among 
men.  We  have  been  greatly  blest  in  that  we  have  escaped 
the  worst  results  so  long. 


THE  INDUSTRIAL   STAGE  IN  THE   UNITED   STATES      71 

Concentration  and  Integration  of  Modern  Industry.  — 
Thus  far  we  have  been  considering  the  effects  of  com- 
petition chiefly  upon  the  laborers,  and  in  tracing  these 
effects  the  history  of  England  has  been  peculiarly  instruc- 
tive. When,  however,  we  turn  to  the  results  of  such  com- 
petition in  the  case  of  employers,  we  find  that  our  own 
country  offers  the  most  striking  illustrations.  Owing  to 
the  peculiar  circumstances  of  our  situation,  the  results  of 
competition  among  employers  have  developed  more  rapidly 
here  than  abroad.  Though  repeated  conflicts  with  their 
workmen  have  led  to  a  certain  feeling  of  common  interest 
in  the  matter  of  labor,  and  even  to  frequent  combinations 
for  mutual  defence  against  the  demands  of  employees,  yet 
on  the  other  hand  the  principle  of  competition  has  made 
them  almost  Ishmaelites  in  their  business  relations  with 
one  another. 

Those  resources  to  which  we  have  referred  as  mitigat- 
ing the  sufferings  of  employees  have  not  in  the  same  way 
been  available  to  the  employers.  Tied  down  to  their 
large  investments  of  fixed  capital,  they  have  been  com- 
pelled to  stand  and  fight  out  to  the  end  the  war  without 
quarter.  In  every  such  warfare  the  number  of  comba- 
tants tends  to  decrease.  As  old  rivals  are  killed  off,  the 
successful  acquire  greater  skill  and  greater  power  in  the 
conflict.  With  the  passage  of  time  greater  and  greater 
equipment  is  required  to  give  any  hope  of  a  successful 
struggle.  There  are  industries  in  which  no  such  concen- 
tration has  taken  place,  but  for  a  great  and  apparently 
growing  number  of  industries  our  description  holds  true. 
Thus,  in  spite  of  the  enormous  growth  of  our  industries 
and  population,  the  number  of  competitors  in  many  in- 
dustries has  of  late  shown  noticeable  decrease.  We  cite 


72          ELEMENTARY  PEINCIPLES  OF  ECONOMICS 

but  one  instance,  and  that  not  the  most  striking,  from  the 
twelfth  census  of  the  United  States  :  "  The  present  ten- 
dency toward  large  industries  under  one  management  is 
illustrated  in  the  statistics  of  coke  production  in  1899. 
The  total  amount  of  coke  produced  has  increased  96.2 
per  cent,  and  the  value  of  all  products"  (including  by- 
products) "  has  increased  115. 7  per  cent,  while  the  num- 
ber of  active  establishments  reporting  for  1899  was  only 
23,  or  10.6  per  cent  more  than  the  number  reporting  for 
1889."  This  is  typical  of  what  is  taking  place  in  an 
increasing  number  of  industries.  Competition  of  small 
producers  attained  its  maximum  in  the  decade  between 
1870  and  1880,  when  it  became  familiarly  known  as  "  cut- 
throat" competition.  But  for  the  existence  of  free  land, 
undeveloped  resources,  and  the  constant  increase  of  in- 
ventions, widespread  disaster  must  have  resulted.  Since 
that  time  the  relative  number  of  competitors  has  kept 
on  decreasing,  as  our  illustration  shows,  and  many  lines  of 
industry  have  fallen  into  fewer  and  fewer  hands.  Many 
instances  might  be  cited  in  which  there  has  been  not 
merely  a  relative  but  even  an  absolute  decrease  in  the 
number  of  competitors. 

Recently  the  movement  toward  large  scale  industry  has 
taken  on  another  phase.  In  addition  to  concentration  or 
centralization  of  industry,  we  are  now  having  a  rapidly  in- 
creasing integration  of  industry.  Large  business  concerns 
are  finding  it  profitable  to  carry  on,  under  one  manage- 
ment, several  closely  related  industries.  Thus  there  are 
many  cases  of  integration  where  a  manufacturing  concern 
produces  its  own  materials  and  its  own  machinery,  and 
provides  in  part  its  own  transportation  facilities. 

Monopolies.  —  Centralization  of  industry  may  be  incom- 


THE  INDUSTRIAL   STAGE  IN  THE   UNITED  STATES     73 

plete  or  complete.  When  it  is  complete,  we  have  an 
entire  industry  under  the  management  of  a  single  individ- 
ual, partnership,  or  corporation.  When  such  a  state  of 
things  exists,  or  is  so  nearly  approached  that  a  single  uni- 
fied management  can  exercise  control  over  the  supply,  and 
hence  over  the  price,  of  the  product,  we  have  a  monopoly. 
Incomplete  centralization  may  not  lessen  competition  at 
all;  it  may  even  increase  the  sharpness  and  bitterness  of 
the  competition.  It  simply  gives  business  into  the  hands 
of  those  producers  who  are  best  able  to  continue  it  under 
the  vigorous  conditions  which  existing  competition  im- 
poses upon  the  rivals. 

We  might  naturally  expect  that  where  the  tendency  to 
centralization  is  strongest,  as  in  the  United  States,  the 
tendency  to  complete  centralization,  or  monopoly,  would 
also  be  strongest,  and  American  experience  would  seem 
to  justify  the  expectation.  Thus  two  of  the  great  prob- 
lems now  before  the  people  of  our  country  are  those  con- 
nected with  the  concentration  and  integration  of  industry, 
which  leads  to  the  so-called  trusts,  and  with  the  complete 
centralization  of  an  industry,  which  is  monopoly.  It  is 
particularly  in  the  class  of  so-called  natural  monopolies 
that  the  development  has  in  recent  times  been  most  rapid 
and  most  startling.  Natural  monopolies  are  those  that 
rest,  not  upon  the  will  of  society,  but  upon  conditions 
inherent  in  the  nature  of  the  business  itself.  Such  are 
all  the  monopolies  of  transportation  and  communication. 
The  reason  for  the  unusual  development  of  these  monopo- 
lies in  recent  days  lies  in  the  fact  that  the  whole  trans- 
portation system  of  the  world  has  been  developed  within 
little  more  than  fifty  years. 


74          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

II.   STATE  REGULATION  OF  COMPETITION  IN  THE 
UNITED  STATES 

Labor  Legislation  in  the  United  States. — We  have 
already  noted  and  explained  the  fact  that  the  misery 
and  degradation  of  the  wage-earning  classes,  which  in 
England  led  to  a  reaction  in  favor  of  an  active  policy  of 
government,  were  not  felt  so  quickly  nor  so  keenly  in  the 
United  States.  With  us,  therefore,  there  was  in  earlier 
days  no  urgent  demand  for  legislation  in  behalf  of  the 
laborers.  Similar  conditions,  however,  led  in  the  end  to 
like  results,  and  in  most  of  the  commonwealths  of  the 
American  Union  we  have  a  considerable  body  of  factory 
legislation  for  the  protection  of  the  wage-earners  and  for 
the  promotion  of  their  welfare.  Massachusetts,  among 
the  foremost  in  the  extent  of  her  manufacturing  interests, 
is  naturally  among  the  foremost  also  in  the  matter  of 
labor  laws,  her  factory  legislation  being  surpassed  only  by 
that  of  England.  The  growth  of  such  legislation  in  our 
country  illustrates  the  principles  which  we  have  already 
explained,  for  it  has  followed  the  line  of  industrial  de- 
velopment as  it  spread  from  New  England  to  the  West 
and  South.  Indeed,  there  is  special  illustration  of  what 
we  have  been  explaining  in  the  recent  labor  experience  of 
certain  Southern  states  which  have  only  recently  entered 
extensively  into  manufacture.  It  is  found  that  those 
states,  which  have  recently  begun  to  compete  with  Massa- 
chusetts, all  repeat  many  of  the  darkest  pages  of  early 
English  experience,  and  that  while  they  are  possibly  gain- 
ing a  temporary  industrial  advantage  over  the  older  state, 
public  opinion  is  rapidly  organizing  to  protest  against 
a  temporary  industrial  advantage  being  gained  at  the  cost 


THE  INDUSTRIAL   STAGE  IN  THE   UNITED  STATES     75 

of  the  permanent  welfare  of  the  workmen  of  the  South  as 
well  as  in  Massachusetts.  True,  some  of  the  advantages 
possessed  by  the  Southern  states  are  derived  from  climate, 
proximity  to  raw  material,  the  absence  of  antiquated 
machinery,  etc.,  and  if  these  advantages  are  not  offset 
by  the  better  labor  market  of  Massachusetts,  her  greater 
accumulation  of  capital,  with  lower  interest  charges,  her 
lower  freight  charges,  her  nearness  to  the  consumers' 
markets,  her  helpful  traditions  of  production,  etc.,  the 
new  states  will  confer  a  benefit  upon  society  by  producing 
the  goods,  even  though  it  be  at  a  serious  temporary  cost 
to  the  old  New  England  state.  In  any  event,  the  South 
must  in  time  follow  England  and  Massachusetts  in  regard- 
ing higher  and  more  permanent  interests  than  the  mere 
increase  of  output. 

Legislation  against  Adulteration.  —  America  and  Eng 
land  have  also  differed  in  their  readiness  to  give  heed 
to  the  adulteration  of  goods  and  the  falsification  of  wares. 
And  yet  we  have  certainly  had  need  of  some  action  in 
these  matters.  Not  only  have  we  become  painfully  famil- 
iar with  the  style  of  goods  which  unrestrained  competi- 
tion always  produces,  and  which  are  known  in  England 
by  the  expressive  term  "cheap  and  nasty,"  but  we  have 
also  with  us,  as  commonly  as  anywhere  in  the  world, 
adulterations  that  menace  life  and  health.  The  fact  that 
the  theory  of  non-interference  has  never  been  so  com- 
pletely shattered  as  in  England  by  the  pressure  of  labor 
interests,  coupled  with  the  fact  of  the  delicate  balance  of 
authority  between  state  and  Nation,  probably  accounts  in 
considerable  measure  for  our  general  reluctance  to  intrust 
to  government  the  duty  of  inspecting  wares.  Within  the 
last  few  years  more  serious  attention  has  been  given  to 


76          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

the  matter,  the  Federal  government  and  many  states  have 
moved  rapidly  and  vigorously  in  the  prevention  of  adul- 
teration, and  the  growing  interest  in  economic  questions 
is  likely  to  result  in  a  better  realization  of  our  cooperative 
power  and  duty. 

The  State  and  Monopolies.  —  The  question  of  the  right 
relation  of  the  State  to  industry  has  nowhere  proved  more 
embarrassing  and  difficult  than  in  the  case  of  monopolies, 
and  especially  of  the  great  class  of  monopolies  which  we 
have  called  natural.  Here,  even  more  than  elsewhere,  it 
has  been  brought  home  to  men  that  the  principle  of  State 
passivity  cannot  safely  be  accepted.  The  history  of  at- 
tempts to  control  these  monopolies  is  long  and  confus- 
ing, but  we  may  distinguish  three  fairly  distinct  methods : 
attempts  to  enforce  competition,  public  control,1  and  pub- 
lic ownership. 

1.  Attempts  to  enforce  Competition.  — When  the  monop- 
oly problem  on  a  vast  scale  first  presented  itself,  society 
was  still  possessed  by  the  idea  of  the  beneficence  of  the 
universal  rule  of  self-interest.  It  was  natural,  therefore, 
to  attempt  to  enforce  competition  in  the  new  field  of 
industry.  Railway  charters  and  charters  for  municipal 
service  corporations  were  granted  freely,  even  recklessly, 
in  the  belief  that  competition  would  thus  be  secured. 
But  competition  cannot  exist  where  monopoly  is  natural. 
The  whole  history  of  attempts  to  secure  such  competition 
is  a  history  of  failure.  A  single  illustration  may  serve 

1  Frequently  the  expressions  State  control  and  State  ownership  are 
employed,  this  word  "  State"  then  being  used  in  its  generic  sense,  and 
meaning  the  local  unit  and  nation,  as  well  as  the  separate  state.  The 
ambiguity  in  the  word  "State"  is  avoided  by  employing  the  term 
"  public." 


THE  INDUSTRIAL   STAGE  IN  THE   UNITED  STATES     77 

our  purpose.  The  state  of  New  York  gave  a  railway 
charter  to  the  West  Shore  Company,  which  constructed 
a  line  parallel  to  that  of  the  New  York  Central.  In 
granting  the  charter,  the  state  attempted  to  enforce  real 
and  permanent  competition  by  the  stipulation  that  the 
railway  should  never  be  sold  to  its  rival.  Yet  after  a  few 
years  of  disastrous  rate  "  wars "  the  new  road  was  leased 
to  the  Central  in  1885  for  475  years.  The  same  expe- 
rience has  been  repeated,  again  and  again,  as  often  as  the 
experiment  has  been  tried. 

2.  Public  Control.  —  The  second  method  of  solving  the 
social  problem  involved  in  natural  monopolies  is  that  of 
public  control  or  regulation.  This  method  began  to  be 
tried  about  forty  years  ago  with  the  rise  of  the  "  granger  " 
movement,  which  was  at  first  a  mere  unorganized  uprising 
of  farmers  against  railway  abuses,  but  which  later  devel- 
oped into  an  organized  movement,  having  as  its  centre 
the  "  Order  of  the  Patrons  of  Husbandry,"  founded  in 
1867.  The  result  was  that  many  states  passed  laws  regu- 
lating railway  rates  and  binding  the  roads  by  other  rules 
of  action.  Much  of  this  legislation  was  so  ill  considered 
that  it  was  soon  repealed,  and  the  movement  itself  was 
thereby  for  a  time  discredited.  But  a  renewal  of  the 
effort  has  resulted  in  the  creation  of  state  and  Federal 
railway  commissions,  with  certain  powers  of  supervision, 
adjudication,  and  control. 

The  policy  of  public  control  has  hitherto  proved  diffi- 
cult of  application,  not  only  in  the  case  of  railways,  but 
also  in  the  case  of  the  large  class  of  municipal  natural 
monopolies.  Wealthy  corporations,  retaining  the  best 
legal  talent,  have  shown  endless  ingenuity  in  evasion, 
and  great  power  in  retaliation,  as  is  abundantly  shown  in 


78          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

the  annual  reports  of  the  United  States  Interstate  Com- 
merce Commission.  Yet  distinct  gains  have  been  made, 
largely  through  the  influence  of  educated  public  opinion, 
in  removing  abuses  from  the  railway  service,  and  in  safe- 
guarding the  interests  of  cities  in  their  granting  of 
municipal  franchises. 

3.  Public  Ownership.  —  The  great  difficulties  in  the 
way  of  successfully  applying  the  first  two  methods  have 
led  a  growing  number  of  people  to  look  with  favor  upon 
the  method  of  public  ownership  of  natural  monopolies, 
with  or  without  government  management  of  the  business. 
In  the  case  of  municipal  waterworks,  the  practice  already 
obtains  very  generally.  An  increasing  number  of  cities 
have  taken  in  their  own  hands  other  forms  of  municipal 
service.  Technical  and  political  considerations  make  it 
quite  possible  that  a  given  city  may  wisely  own  one  form 
of  municipal  monopoly  and  at  the  same  time  refrain,  with 
equal  wisdom,  from  taking  over  others.  We  cannot  here 
discuss  these  many  considerations,  but  in  closing  we  may 
express  the  opinion  that  the  tendency  seems  increasingly 
toward  this  third  policy  of  dealing  with  monopolies.  Cer- 
tainly, the  solution  of  the  monopoly  problem  lies  to-day 
between  the  methods  of  public  regulation  and  public  own- 
ership. Which  one,  if  either,  will  in  the  end  prove  the 
sole  reliance  of  society,  it  would  be  rash  to  attempt  to 
predict. 

SUMMARY 

1.  In  the  United  States,  owing  to  free  land  and  the  lack  of  manu- 

facturing, the  transition  to  the  industrial  stage  was  not  marked 
by  violence  or  suffering. 

2.  The  intensity  of  competition  in  the  United  States  has  been  felt 

more  keenly  by  the  manufacturers,  and  concentration  of  indus- 
try has  thus  been  hastened. 


THE  INDUSTRIAL   STAGE  IN  THE   UNITED  STATES     79 

3.  The  tendency  to  complete  centralization  of  industry,  or  monopoly, 

gives  rise  to  grave  social  problems. 

4.  Three  methods  of  solving  the  monopoly  problem  have  been  tried  : 

artificial  competition,  public  control,  and  public  ownership. 

5.  American  experience  confirms  that  of  England  in  condemning 

unrestrained  competition. 

QUESTIONS 

1.  Contrast  the  Industrial  Revolution  in  the  United  States  with  the 

same  change  in  England. 

2.  What  has  been  the  effect  of  the  mobility  of  population  in  the 

United  States? 

3.  What    is    integration    of    industry?      Complete    centralization? 

Natural  monopoly? 

4.  Discuss   the    different  experiments   in  attempting  to  solve  the 

monopoly  problem. 

5.  Mention  some  of  the  ways  in  which  the  government  in  the  United 

States  regulates  competition. 

LITERATURE 

Coman,  Katherine:   The  Industrial  History  of  the  United  States. 

Ely,  R.  T. :  Monopolies  and  Trusts,  Ch.  V,  and  The  Evolution  of  Indus- 
trial Society,  pp.  58-66. 

Hadley,  A.  T. :  Railroad  Transportation,  Ch.  II. 

Jenks,  J.  W. :  The  Trust  Problem. 

Spahr,  C.  B.  :  Present  Distribution  of  Wealth  in  the  United  States, 
Ch.  II,  pp.  24-49. 

Wells,  D.  A. :  Recent  Economic  Changes,  Ch.  I,  pp.  1-10. 

Wright,  C.  D. :  The  Industrial  Evolution  of  the  United  States,  Part  II, 
Ch.  XIV,  pp.  174-189. 


BOOK  III 

ECONOMIC  THEORY 


PART  I.  —  CONSUMPTION 


CHAPTER  I 

INTRODUCTORY 

UTILITIES  AND  GOODS 

WE  have  now  studied  the  history  of  man's  efforts  to 
get  a  living,  and  the  fundamental  conditions  which  de- 
termine all  his  efforts  to  that  end.  We  have  now  to 
study  analytically  the  process  by  which  he  gets  his  living 
to-day,  remembering  that  the  process  is  conditioned  fun- 
damentally, and  that  those  fundamental  conditions  have 
their  roots  far  in  the  past. 

Reason  for  studying  Consumption  First.  —  When  we  in- 
quire why  men  display  what  we  call  economic  activity, 
we  discover  at  once  that  it  is  because  they  have  wants 
which  they  aim  to  satisfy.  Most  immediately  connected 
with  wants  in  any  analysis  of  the  subject  is  the  satisfaction 
of  them,  and  therefore  it  is  not  illogical  to  study  first  of 
all  that  branch  of  the  subject  which  we  have  called  by  the 
name  "consumption." 

Definitions.  —  When  anything  has  the  power  of  satisfy- 
ing human  wants,  we  say  that  it  is  a  good  thing,  or  that 

80 


UTILITIES  AND  GOODS  81 

it  possesses  utility.  In  economics,  these  words  "good" 
and  "  utility  "  are  made  to  apply  to  the  things  or  services 
themselves.  To  give  a  definition,  therefore,  we  may  say 
that  a  good  or  utility  is  anything  which  can  satisfy  a  human 
want.  And  here  we  must  pause  to  caution  the  student 
that  the  word  "  good  "  is  applied  to  any  such  thing  even 
though  the  thing  ministers  to  a  want  which  were  better 
left  unsatisfied.  The  idea  from  the  economic  standpoint 
is  simply  that  the  thing  is  good  in  the  sense  of  being 
adapted  to  the  want,  however  reprehensible  the  want 
may  be.  Notice  that  this  definition  of  the  term  "  good  " 
includes  not  merely  material  things  such  as  food  and 
clothes,  but  also  such  immaterial  things  as  personal  ser- 
vices. The  advice  of  a  physician  and  a  new  invention 
are  goods  that  we  desire  and  are  willing  to  pay  for,  but 
they  do  not  exist  in  any  physical  form.  Goods  or  util- 
ities, then,  may  be  divided  into  the  two  great  classes  of 
(1)  material  things,  and  (2)  personal  services. 

Free  Goods  and  Economic  Goods.  —  When  we  come  to 
analyze  goods  further,  we  find  that  some  of  them  are  given 
by  nature  in  such  abundance  that  all  of  us  may  have  our 
wants  for  them  satisfied  without  effort.  Thus,  air  is  a 
utility  of  the  first  importance  ;  but  in  all  ordinary  cir- 
cumstances it  is  so  abundant  that  we  can  satisfy  our 
wants  for  it  without  any  exertion.  All  such  goods  are 
therefore  called  free  goods. 

But  we  find  by  hard  experience  that  before  we  can 
satisfy  many  of  our  wants,  either  we  ourselves  must  make 
efforts,  or  others  must  exert  themselves  for  us.  The  rea- 
son is,  that  the  supply  of  such  utilities  is  limited  either 
(1)  by  the  impossibility  of  increasing  their  number  or 
amount  at  all,  as  is  the  case,  for  instance,  with  paintings 
o 


82          ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

by  old  masters,  or  (2)  by  the  necessity  of  labor  and  sacri- 
fice for  further  increase  in  their  supply,  as  is  the  case  with 
watches  and  houses,  and,  indeed,  with  the  greater  number 
of  things  with  which  we  are  daily  brought  in  contact. 

Inasmuch  as  these  goods  are  limited  in  quantity,  they 
can,  as  a  rule,  be  obtained  only  by  human  exertion  or 
sacrifice.  And  being  thus  obtained,  they  can  be  ex- 
changed or  transferred  from  hand  to  hand  by  those  who 
possess  them.  Of  course,  many  goods  —  land,  for  in- 
stance —  are  of  such  a  nature  that  they  cannot  be  readily 
transferred  or,  in  some  cases,  be  actually  transferred  at  all. 
In  such  cases,  transfer  of  title  takes  the  place  of  actual 
transfer  of  the  goods.  Again,  it  is,  of  course,  impossible 
for  one  man  to  transfer  to  another  any  special  ability  that 
he  may  possess.  But  the  services  which  such  special 
ability  may  enable  one  to  render  may  be  exchanged  for  the 
services  of  others  or  for  material  goods,  and  we  may  regard 
such  services  as  falling  in  the  same  class  with  the  other 
goods  which  we  have  been  describing.  All  such  goods  we 
call  economic  goods,  because  they  are  the  ones  which  man 
spends  his  life  in  acquiring,  and  because  the  wants  for 
them  and  the  efforts  and  sacrifices  made  in  obtaining 
them  are  susceptible  of  such  money  measurement  as  en- 
ables them  to  be  the  subject  of  scientific  analysis.  To 
sum  the  matter  up  in  the  form  of  a  definition  :  Economic 
goods  are  goods  which  are  so  limited  in  quantity  that  their 
possession,  on  the  one  hand,  regularly  requires  exertion  or 
sacrifice,  and,  on  the  other  hand,  gives  the  opportunity  of 
transferring  or  exchanging  them. 

When  we  speak  of  economic  goods  taken  collectively  or  in 
a  body,  we  use  the  word  "  wealth,"  whether  the  body  of 
such  goods  be  great  or  small. 


UTILITIES  AND  GOODS  83 

Different  Kinds  of  Utility.  —  There  are  only  four  ways 
in  which  goods  can  satisfy  our  wants.  In  the  first  place, 
a  good  satisfies  our  wants  by  virtue  of  the  elements  of 
which  it  is  composed.  Thus,  coal  is  so  constituted  that 
under  certain  conditions  and  in  certain  relations  it  pro- 
duces heat.  This  utility  which  a  thing  possesses  by  virtue 
of  the  elements  of  which  it  is  composed  we  call  (1)  ele- 
mentary utility. 

But  the  coal  as  it  is  in  the  mine  is  not  ready  to  satisfy 
man's  wants.  It  must  first  be  broken  up  by  the  miner 
into  such  fragments  as  are  convenient  for  man's  purposes. 
Its  form  must  be  changed.  This  utility  which  a  good 
possesses  by  virtue  of  the  form  in  which  it  exists  we  call 
(2)  form  utility.  Manufacturing  gives  as  its  result  form 
utilities,  and  we  generally  think  of  manufactured  products 
when  we  speak  of  this  kind  of  utilities. 

When  the  coal  has  been  changed  by  labor  into  a  form 
fitted  for  human  uses,  it  is  still  necessary  to  convey  it  to 
those  who  are  to  use  it.  The  new  utility  which  is  given 
to  the  coal  by  moving  it  from  the  mine  to  the  place  where 
it  is  to  be  used  we  call  (3)  place  utility. 

Finally,  this  coal  which  possesses  elements  fitting  it  for 
human  use,  which  has  had  its  form  changed  by  the  miner, 
and  which  has  now  been  transported  to  a  place  convenient 
for  its  consumption,  is  kept  until  the  time  when  it  is  to  be 
used.  The  utility  which  a  good  possesses  by  virtue  of  its 
being  present  at  a  time  convenient  to  the  consumer  we 
call  (4)  time  utility. 

Elementary  utility,  form  utility,  place  utility,  and  time 
utility  :  these,  in  their  logical  order,  are  all  the  kinds  of 
utility  that  any  goods  ever  do  or  can  possess.  Goods 
about  to  be  consumed  of  course  have  all  four  kinds  of 


84          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

utility  ;  but  in  the  case  of  any  particular  commodity  some 
one  utility  is  likely  to  be  of  special  importance.  Thus, 
ice  in  summer  has  as  its  most  evident  utility  that  of  time. 
In  the  same  way,  great  place  utility  is  added  to  tea  when 
it  is  carried  from  Japan  or  Ceylon  to  the  consumer  in  an 
American  town. 

Wealth  Consumption.  —  Man  satisfies  his  wants  by  the 
enjoyment  of  these  utilities  which  we  have  been  describ- 
ing. In  many  cases  enjoyment  of  such  utilities  involves 
their  destruction  by  the  person  who  enjoys  them.  But 
there  are  other  things  whose  utilities  are  not  destroyed 
by  the  user,  but  by  the  elements.  In  such  cases,  the 
destruction  is  usually  gradual  and  slow.  Thus,  a  house 
furnishes  its  utilities  to  the  user  over  a  long  period  of 
years.  The  direct  satisfaction  of  human  wants  by  the  enjoy- 
ment of  the  utilities  in  goods  is  called  consumption.  When 
goods  afford  such  direct  satisfaction  only  in  a  single  act 
of  enjoyment,  they  are  called  perishable  goods.  Such,  for 
instance,  are  coal  and  food.  But  a  house,  a  book,  or  a 
carriage  affords  satisfaction  of  human  wants  in  repeated 
acts  of  using.  To  take  an  extreme  instance,  land  may  be 
made  to  afford  satisfaction  of  human  wants  through  all 
time.  These  are  durable  goods.  Defining,  we  may  say 
that  perishable  goods  are  those  that  lose  their  utilities  in  a 
single  satisfaction  of  human  wants;  durable  goods  are  those 
that  afford  repeated  satisfaction  of  human  wants. 

Productive  Consumption.  —  Some  authors  include  under 
the  name  consumption  a  destruction  of  utilities  which  is 
designed  to  result  in  the  creation  of  new  and  greater 
utilities.  Thus,  when  coal,  instead  of  being  used  in  a 
residence  to  warm  the  occupants,  is  used  in  the  engines 
of  a  factory,  it  is  often  said  that  the  coal  is  being  con- 


UTILITIES  AND  GOODS  85 

sumed  productively.  If  we  call  such  consumption  produc- 
tive consumption,  we  must  use  some  distinguishing  word 
in  referring  to  a  destruction  of  utilities  which  satisfies 
human  wants  directly.  The  expression  adopted  for  this 
purpose  is  final  consumption.  But  since  productive  con- 
sumption is  only  a  part  of  the  process  of  production,  we 
may  fairly  confine  the  use  of  the  word  "  consumption  "  to 
the  final  and  immediate  satisfaction  of  human  wants  by 
the  enjoyment  of  the  utilities  afforded  by  goods. 

Relation  of  Consumption  to  Production.  —  We  must, 
for  scientific  reasons,  keep  somewhere  a  distinction  be- 
tween consumption  and  production,  although,  as  appears 
above,  the  two  often  shade  into  each  other.  Consumption 
and  production  are  correlative.  Consumption  furnishes 
the  motive  to  production.  Production  affords  materials 
and  services  for  consumption.  Consumption  makes  pro- 
duction necessary  at  the  same  time  that  it  makes  produc- 
tion possible.  To  sum  up  in  a  word,  consumption  is  the 
end  and  means  of  production,  and  of  all  economic  activ- 
ity; production  is  the  means  of  consumption. 

SUMMARY 

1.  Since  want  satisfaction  forms  the  motive  to  all  economic  activity, 

consumption  may  properly  be   made  the  first  division  of  eco- 
nomic theory. 

2.  The  character  and  extent  of  human  wants  have  been  progressively 

changing. 

3.  Want  satisfiers  are  called  utilities  or  goods. 

4.  Free  goods  are  unlimited  in  quantity  and  cost  us  nothing;  eco- 

nomic goods  require  economic  activity  in  their  getting  and  using. 

5.  There  are  four  kinds  of  utility  :  elementary,  form,  place,  and  time. 

6.  Consumption  is  the  use  of  goods  in  the  final  satisfaction  of  human 

wants. 

7.  Consumption  is  the  end  and  means  of  production ;  production  is 

the  means  of  consumption. 


86          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

QUESTIONS 

1.  Why  is  consumption  first  studied  ? 

2.  What  is  a  utility  ?    Illustrate.     What  are  free  goods?    Illustrate. 

What  are  ecouomic  goods?  Illustrate.  Is  water  ever  an  eco- 
nomic good  ? 

3.  Give  examples  of  elementary  utility ;   of  form  utility ;   of  place 

utility ;  of  time  utility.  What  utility  does  the  miller  pro- 
duce? The  railway?  Explain  the  fallacy  in  the  statement  that 
the  farmer  is  the  only  producer. 

4.  Give  examples  of  perishable  and  durable  goods. 

5.  Why  cannot  the  name  consumption  be  applied  to  the  use  of  corn 

in  fattening  hogs  ?  In  what  sense  is  coal  burned  in  a  factory 
furnace  consumed  ?  Is  the  consumption  of  food  by  laborers 
final  or  productive  consumption  ?  Explain. 

LITERATURE 

Devine,  E.  T. :  Economics,  Ch.  V,  pp.  73-78. 
Patten,  S.  N. :  The  Consumption  of  Wealth. 


CHAPTER  II 
THE  LAW  OF  DIMINISHING  UTILITY 

Illustrations  of  the  Law.  —  The  wants  of  men  are  in- 
numerable and,  considered  as  a  whole,  are  never  satisfied. 
There  seems  to  be  no  limit  to  the  variety  of  things  desired. 
But  if  we  single  out  any  one  commodity,  we  find  that  our 
desire  for  it  is  limited.  We  have  all  heard  of  the  king 
who  wanted  gold  and  who  got  so  much  that  he  finally 
loathed  the  sight  of  it.  The  story  of  King  Midas  is  but 
an  illustration  of  what  the  economists  call  the  law  of 
diminishing  utility  or  the  law  of  satiable  demand.  Let  us 
consider  the  case  of  a  desert  traveller  who,  having  long 
before  exhausted  his  supply  of  water,  comes  upon  an  oasis 
with  a  cooling  spring.  The  first  cup  of  water  may  save 
his  life,  and  would  therefore  have  a  utility  which  we  may 
call  absolute.  A  second  cup  may  still  have  a  very  high 
degree  of  utility  ;  but  if  we  suppose  him  to  continue  the 
drinking,  we  know  that  the  later  additions  to  his  satisfac- 
tion will  gradually  grow  less  and  that  he  cannot  go  on 
long  without  coming  to  a  point  where  any  further  con- 
sumption will  cause  not  pleasure  but  pain. 

This  is  graphically  represented  in  the  figure  on  page  88. 

In  the  figure,  let  the  equal  spaces  1,  2,  3,  4,  5,  6,  7  on 
the  line  AB  represent  equal  portions  of  water,  and  let  the 
perpendicular  lines  represent  the  height  to  which  satisfac- 

87 


88          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

tion  rises  in  drinking  the  respective  portions.     Then  the 
parallelograms  would  represent  the  total  satisfaction  de- 
rived from  the  successive  acts  of  consumption. 
It  will  be  noticed  that  the  first  parallelogram 
is  left  open  at  the  top.     This  is  because  in  the 
example  the  utility  of  the  first  cup  of  water, 
since   it  saved  life,  is   not   susceptible   of 
measurement.     The  line  at  the  right, 
therefore,  is   to   be   thought  of 
as  a  continuing  line  rather 
"  than  as  terminating  at  a. 

If  now  we   think  of 
the    man    as 

\o         drinking  suc- 

~ — — Q  B  cessive     por- 
tions of  the 

water  which  are  very  small,  —  mouthfuls,  for  instance,  —  our 
figure  would  have  to  be  drawn  as  follows :  — 
Y  XA  Here,  as  before,  the  utility  of  the  first  water  consumed  is 
absolute,  and  therefore  the  curved  line  AB  is  repre- 
sented as  not  touching  the  perpendicular  OF  in  any 
point.  The  different  increments  consumed  are  to 
be  thought  of  as  points  along  the  line  OX,  and  the 
satisfaction  derived  from  any  increment,  as  ra, 
is  measured  by  a  perpendicular,  as  mn,  cut- 
ting the  curve  of  diminishing  utility.  The 
curve  cuts  the  horizontal  OX  in  the 
point  B,  representing  the  point  at 
which  utility  from  the  water  ceases, 
and  disutility  would  begin 
should  consump- 

— x  tion  continue. 

With  the  fig- 
ures and  example  clearly  in  mind,  let  us  now  consider  some 
of  the  particulars.  Each  unit  of  the  commodity  consumed  is 


THE  LAW  OF  DIMINISHING   UTILITY  89 

called  an  increment  of  supply  or  an  increment  of  consump- 
tion. The  utility  of  the  first  unit,  which  in  this  case  is 
absolute,  is  called  the  initial  utility.  The  potential  utility 
of  an  increment  not  actually  possessed  or  consumed  is 
called  the  marginal  utility.  But  note  this.  In  our  diagram 
and  in  the  example,  we  have  assumed  that  the  consump- 
tion of  water  is  carried  to  a  point  beyond  which  further 
consumption  would  give  no  satisfaction,  and  therefore  the 
marginal  utility  in  this  case  is  0.  But  if  we  had  assumed 
that  the  consumption  had  stopped  at  m,  then  the  marginal 
utility  of  the  consumption  would  be  represented  by  the  utility 
of  the  unit  m,  as  measured  by  the  perpendicular  mn. 

But  the  law  which  we  are  studying  is  of  wider 
application  than  to  the  mere  case  of  consumption.  It 
applies  as  well  to  possession.  Whenever  we  have  a 
stock  of  any  commodity,  we  realize  that  the  commodity 
has  a  utility  for  us  even  when  we  are  not  in  the  act 
of  consuming  it.  The  law  applies  therefore  to  the  utility 
of  the  commodity  whether  we  are  actually  consuming 
it  or  are  retaining  the  power  to  consume  it  at  some 
future  time. 

Formal  Statement  of  the  Law.  —  We  are  now  prepared 
to  understand  a  formal  statement  of  the  important  eco- 
nomic law  of  diminishing  utility.  It  is  as  follows :  At  any 
given  time  the  marginal  utility  of  any  commodity  to  its  owner 
decreases  with  every  increase  of  the  stock  of  it. 

Limitation.  — Notice  that  this  statement  of  the  law  con- 
tains the  qualification,  at  any  given  time.  The  impor- 
tance of  this  qualification  becomes  evident  when  we  return 
to  a  consideration  of  our  illustration.  We  know  that 
when  the  utility  of  water  has  fallen  to  zero,  it  needs  not 
long  to  wait  before  the  satisfaction  to  be  derived  from  con- 


90          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

sumption  again  becomes  keen.  With  the  consumption  of 
some  things,  the  importance  of  the  qualification  becomes 
even  greater.  A  boy  finds  that  any  clothing  beyond  a 
very  small  amount  has  a  low  added  utility  for  him.  But 
as  he  grows  into  young  manhood,  his  wants  change  so  far 
that  a  much  larger  supply  of  clothes  has  as  great  a  margi- 
nal utility  as  his  slender  stock  possessed  before.  When- 
ever different  times  are  considered,  therefore,  we  must 
make  complete  allowance  for  the  change  of  wants  in  the 
interval. 

The  Case  of  Money.  —  With  this  in  mind,  we  may  say 
that  the  law  of  diminishing  utility  applies  to  money  as  to 
all  other  goods,  although  the  rate  of  diminishing  utility  is 
much  slower,  because  money  represents  general  purchas- 
ing power  and  permits  variety  in  consumption.  With 
variety  in  consumption,  as  we  all  know  from  experience, 
satiety  is  reached  more  slowly  than  without  it.  Neverthe- 
less, at  any  given  time  the  hundredth  dollar  of  one's  stock 
has  a  lower  utility  than  the  ninety-ninth  or  any  other  pre- 
ceding one.  Thus  it  follows  that  to  a  rich  man,  other 
things  being  equal,  money  has  a  less  marginal  utility  than 
to  a  poor  man. 

SUMMAEY 

1.  The  law  of  diminishing  utility  explains  how  increasing  supply 

means  decreasing  utility  per  unit  of  supply. 

2.  Initial  utility  is  the  utility  of  the  first  unit ;  marginal  utility,  the 

potential  utility  of  a  unit  not  possessed ;  total  utility,  that  of  all 
the  units. 

3.  The  law  of  diminishing  utility  applies  to  money  as  to  other  com- 

modities. 

QUESTIONS 

1.  How  great  is  the  marginal  utility  of  air  under  ordinary  circum- 
stances?   Why? 


THE  LAW  OF  DIMINISHING   UTILITY  91 

2.  How  does  the  law  of  diminishing  utility  apply  when  the  consump- 

tion of  commodities  is  carried  beyond  the  point  of  zero  utility  ? 
Illustrate  by  diagram. 

3.  Give  illustrations  of  the  importance  of  the  qualifying  phrase  "  at 

any  given  time." 

4.  What  significance  has  the  law  as  bearing  upon  the  comparative 

condition  of  the  rich  and  the  poor  ? 

LITERATURE 

See  preceding  chapter.     Also :  — 

Clark,  J.  B. :  Distribution  of  Wealth,  Ch.  XIV,  pp.  209-213. 

Devine,  E.  T. :  Economics,  Ch.  V,  pp.  86-92. 

Marshall,  A. :  Principles  of  Economics,  Bk.  Ill,  Ch.  Ill,  §§  1-4. 


CHAPTER  III 
DEMAND 

The  Economic  Order  of  Consumption.  —  It  follows  from 
the  law  of  diminishing  utility  that  men  in  satisfying  their 
wants  consume  commodities  in  a  fairly  regular  order.  So 
far  as  they  consume  things  to  the  best  advantage,  their 
consumption  is  based  upon  a  balancing  of  these  two  con- 
siderations, —  the  utility  of  the  goods,  and  the  cost  of  pro- 
curing them.  Therefore,  in  deciding  what  wants  they  will 
first  satisfy,  they  will  choose  those  commodities  which  promise 
the  greatest  surplus  of  utility  over  cost.  At  first  thought 
the  matter  is  indeed  simple.  To  a  starving  man,  the 
want  for  food  —  or  the  marginal  utility  of  food  —  is  so 
great  that  he  devotes  all  his  energies  to  satisfying  that 
want.  But  when  his  hunger  has  been  somewhat  appeased, 
the  unsatisfied  want  —  the  marginal  utility  —  of  some 
other  good  appears  great  by  comparison,  and  he  turns  his 
energies  in  that  direction.  From  these  instances  it  might, 
indeed,  appear  that  men  always  seek  to  get  those  things 
for  which  they  have  the  greatest  unsatisfied  want ;  in 
other  words,  that  they  try  to  keep  the  marginal  utilities 
of  all  commodities  equal.  But  a  moment's  reflection  will 
make  it  evident  that  the  different  degrees  of  sacrifice  in- 
volved in  getting  the  different  commodities  prevents  any 
such  adjustment  of  marginal  utilities.  My  desire  for  an 

92 


DEMAND  93 

automobile  may  be  vastly  greater  than  my  desire  for  a 
camera,  but  if  I  must  sacrifice  a  whole  year's  income  to 
get  the  automobile,  I  may  prefer  to  purchase  the  camera. 
It  is  the  relation  between  the  unsatisfied  want  and  the 
sacrifice  required  to  satisfy  the  want  that  determines  our 
choice. 

To  make  this  clearer  let  us  take  a  detailed  example.  Sup- 
pose a  boy  with  twenty-five  cents  of  spending  money  standing 
before  a  booth  at  a  fair,  and  bent  on  satisfying  a  want  for 
goods  there  displayed.  If  peanuts  are  five  cents  a  pint,  it  may 
be  that  his  liking  for  them  will  be  great  enough  to  cause  him 
to  make  a  pint  of  them  his  first  purchase.  But  he  knows  that 
a  second  pint  will  satisfy  a  want  less  keen  than  is  satisfied  by 
the  first.  We  may  imagine  him,  then,  spending  his  second 
nickel  for  popcorn.  In  the  same  way,  it  may  be,  a  first  glass 
of  lemonade  will  give  him  greater  enjoyment  than  would  a 
second  pint  of  peanuts  or  a  second  bag  of  popcorn.  It  is  pos- 
sible that  he  has  no  strong  desire  for  the  other  goods  displayed, 
and  that  he  can  get  greater  satisfaction  from  a  second  pint 
of  peanuts  than  from  anything  else  that  he  could  purchase, 
although  they  will  afford  less  enjoyment  than  he  will  have 
from  either  the  popcorn  or  the  lemonade  which  he  has  bought. 
Again,  it  is  quite  possible  that  he  will  like  a  second  glass  of 
lemonade  better  than  a  third  pint  of  peanuts  or  even  a  second 
bag  of  popcorn,  because  the  action  of  the  law  of  diminishing 
utility  is  more  rapid  in  his  consumption  of  popcorn  than  in 
his  consumption  of  lemonade.  Now  the  boy  has  purchased 
with  his  five  nickels  two  pints  of  peanuts,  one  bag  of  popcorn, 
and  two  glasses  of  lemonade.  The  case  is  the  same  whether 
he  buys  them  all  at  the  same  time  or  distributes  his  purchases 
throughout  an  afternoon.  He  makes  his  purchases  according 
to  his  judgment  as  to  their  varying  utility  in  such  a  way  that 
he  will  receive  the  maximum  enjoyment  from  his  expenditure. 

Illustration  by  Diagram.  — Let  us  illustrate  this  as  before  by 
a  diagram,  as  on  page  94 :  — 


94         ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


I . 


rru 


FIG,  1 


FIG.  2 


r 

.__ 

i 

-6" 

1  1 

i 

2 

h 

3          4     !     5     L_6_,T" 

1  2 


FIG.  3 


FIG.  4 


In  these  figures  the  lines  ox,  o'x',  o"x"  represent  amounts 
of  the  respective  commodities  which  would  reduce  the  margi- 
nal utility  to  zero;  in  other  words,  they  represent  amounts 
such  that  in  no  case  would  the  boy  care  to  consume  them  fur- 
ther. Let  the  parallelograms  represent  the  satisfaction  derived 
from  the  consumption  of  the  different  units.  It  will  be  noticed 
that  the  utility  of  the  first  unit  is  greatest  in  the  first  diagram, 
and  that  it  becomes  less  in  each  succeeding  figure,  but  that  the 
utility  diminishes  more  slowly  in  Figure  3  than  in  Figure  2. 
Now  let  the  cost  of  each  unit  be  measured  by  the  distance 
between  ox,  o'x',  etc.,  and  06,  a'b',  etc.,  since  this  distance  is 
the  same  in  all  cases,  and  in  our  illustration  measures  the  five 
cents  which  each  unit  costs.  In  the  diagrams  it  is  evident 
that  the  first  purchase  will  be  made  of  the  commodity  repre- 
sented in  Figure  1,  since  the  surplus  of  satisfaction  over  cost  is 


DEMAND  95 

greatest  in  that  case,  this  surplus  being  measured  by  the  paral- 
lelogram az,  which  is  larger  than  any  of  the  corresponding 
parallelograms  m,  n,  r,  s.  The  parallelogram  n,  which  repre- 
sents the  surplus  of  utility  over  cost  of  the  first  unit  of  the 
second  commodity, — in  our  illustration,  popcorn,  —  is  greater 
than  the  parallelogram  m,  which  represents  the  surplus  of 
utility  from  a  second  unit  of  the  first  commodity,  and  is  also 
greater  than  the  parallelogram  r,  which  represents  the  surplus 
utility  from  a  first  unit  of  the  third  commodity, — in  this  case, 
lemonade.  It  will,  therefore,  represent  the  second  purchase. 
In  the  same  way  r,  being  next  in  size,  represents  the  third  pur- 
chase; m,  the  fourth;  and  s,  the  fifth.  Notice  that  while  the 
first  unit  of  the  second  commodity  affords  a  surplus,  the  second 
does  not.  Again,  notice  Figure  4,  which  represents  some  com- 
modity that  the  boy  is  not  tempted  to  purchase  with  the  stock 
of  money  in  his  possession. 

It  will  be  interesting  and  valuable  practice  for  the  student 
to  vary  these  figures  to  represent  different  suppositions  regard- 
ing consumption,  and  to  carry  the  process  one  step  farther  by 
supposing  the  units  of  the  commodity  to  be  so  small  that  the 
diminishing  utility  will  be  represented  by  a  curved  line  instead 
of  by  the  broken  lines  that  form  the  top  and  part  of  the  right 
side  of  the  parallelograms  in  our  illustration.  Another  varia- 
tion might  well  be  to  have  the  costs  vary  from  commodity  to 
commodity. 

We  are  now  prepared  for  a  formal  statement  regarding 
the  economic  order  of  consumption.  So  far  as  commodi- 
ties are  purchased  and  consumed  rationally  and  econom- 
ically, (1)  choice  is  in  every  case  determined  by  the  amount 
of  the  surplus  of  utility  over  cost.  It  follows  as  a  natural 
corollary  that  (2)  each  successive  choice  is  dictated  by  the 
desire  to  have  the  surplus  of  utility  of  the  commodity  about 
to  be  consumed  greater  than  the  surplus  which  any  other  com- 
modity of  equal  cost  could  yield. 


96          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

How  Economic  Importance  is  Determined.  —  Each  con- 
sumer estimates  the  economic  importance  of  any  commod- 
ity, not  upon  the  basis  of  its  total  utility,  but  upon  the 
basis  of  its  marginal  utility.  In  other  words,  its  impor- 
tance is  measured,  not  by  the  total  amount  of  satisfaction 
that  it  can  afford,  but  by  the  keenness  of  the  desire  or 
want  that  he  would  feel  if  deprived  of  any  portion  of  the 
supply.  If  I  were  where  I  could  not  make  any  purchases 
of  goods,  nor  add  to  my  stock  in  any  way  for  a  consider- 
able time,  and  if  I  had  in  addition  to  other  goods  fifty 
barrels  of  flour  and  only  three  pounds  of  sugar,  I  should 
evidently  husband  the  sugar  more  carefully  than  the  flour. 
In  other  words,  I  should  calculate  that  with  the  existing 
stocks  a  pound  of  sugar  had  a  greater  economic  impor- 
tance for  me  than  a  pound  of  flour.  If,  however,  instead 
of  the  greater  quantity  of  flour,  I  had  so  little  that  ordi- 
nary consumption  would  use  it  up  before  the  stock  could 
be  replenished,  I  should  attach  the  greater  economic  im- 
portance to  the  flour  instead  of  to  the  sugar.  In  each 
case  my  reason  would  be  the  same.  In  the  first  case 
sugar  would  have  a  greater  marginal  utility  than  flour, 
because  diminution  in  its  supply  would  leave  me  with  an 
unsatisfied  want  keener  than  would  follow  from  an  equal 
diminution  in  the  stock  of  flour.  But  in  the  second  case 
the  flour  would  have  the  greater  marginal  utility,  since  a 
decrease  in  its  supply  would  involve  actual  hunger  before 
the  stock  could  be  replenished. 

It  is  instructive  to  compare  the  relation  between  the 
marginal  utilities  of  two  commodities  with  the  relation 
between  their  total  utilities.  Thus,  a  pound  of  gold  has  a 
greater  economic  importance  than  a  pound  of  iron;  but 
the  total  amount  of  iron  in  existence  has  greater  impor- 
tance than  the  total  amount  of  gold. 


DEMAND  97 

THE  LAWS  OF  DEMAND 

We  have  already  explained  that  the  study  of  human 
wants  is  directly  connected  with  the  study  of  consumption, 
and  that  the  study  of  consumption  leads  to  the  study  of 
demand.  But  we  must  note  that  a  want  for  anything  is 
not  the  same  thing  as  a  demand  for  it.  "  If  wishes  were 
horses,  then  beggars  might  ride."  In  order  that  there 
may  be  a  demand  for  a  thing,  there  must  be  not  only  a 
desire  for  it,  but  also  the  willingness  and  the  ability  to 
offer  for  it  some  sacrifice.  In  other  words,  to  speak  in  the 
language  of  everyday  life,  we  must  not  simply  want  the 
thing,  but  we  must  want  it  enough  to  pay  for  it.  It  must 
be  remembered,  therefore,  that  in  economics,  demand 
means  desire  backed  up  by  means  or  purchasing  power. 

But  in  addition  to  this  definition  of  the  real  meaning  of 
the  word  "  demand  "  in  economics,  we  need  a  definite  way 
of  measuring  its  intensity.  Such  a  method  of  measure- 
ment is  found  in  the,  number  of  units  of  any  commodity 
which  will  be  purchased  at  a  given  price.  If  a  table  be  con- 
structed of  the  different  quantities  of  a  commodity  which 
would  be  purchased  at  different  prices,  such  a  table  will 
describe  what  economists  speak  of  as  the  state  of  demand 
for  the  commodity.  If  to-day  the  people  of  a  certain 
community  are  willing  to  buy 

100  bushels  of  apples  at  f  2.00  per  bushel, 
300  bushels  of  apples  at  $  1.00  per  bushel, 
500  bushels  of  apples  at  $0.75  per  bushel, 
this  list  or  table,  we  say,  shows  the  present  state  of  demand 
for  apples  in  the  community.    The  demand  for  a  commod- 
ity is  said  to  increase  when  the  quantity  that  will  be  taken 
at  a  given  price  increases. 


98          ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Let  us  now  consider  one  by  one  the  conditions  which 
determine  in  any  case  whether  the  demand  shall  be  large 
or  small.  The  formal  statement  of  these  conditions  may 
be  regarded  as  a  statement  of  the  laws  of  demand. 

1.  The  Quantity  demanded  varies  directly  with  the  Mar- 
ginal Utility.  —  Suppose,  in  the  first  place,  that  the  price 
of  a  certain  quality  of  tea  remains  during  a  certain  period 
at  fifty  cents  the  pound,  and  that  during  the  same  period 
the  wealth  of  the  consumers  also  remains  the  same.     Then 
it  is  evident  that  if  the  public  taste  for  any  reason  changes 
in  such  a  way  that  the  marginal  utility  of  tea  becomes  less 
or  greater,  the  demand  will  fall  off  or  increase  to  corre- 
spond.    The  importance  of  this  law  is  especially  evident 
in  the  case  of  commodities  the  demand  for  which  is  sub- 
ject to  sudden  and  violent  fluctuations  through  changes 
of  fashion. 

2.  The    Quantity   demanded   varies    inversely   with   the 
Price.  — Again,  suppose  that  the  wealth  of  consumers  re- 
mains the  same,  and  that  there  is  no  change  in  the  mar- 
ginal utility  of  the  commodity.     Then  it  is  evident  that 
the  amount  demanded  will  be  greater  when  the  price  is 
low  and  smaller  when  the  price  rises.    The  relation  between 
price  changes  and  resulting  changes  in   demand  varies 
with  different  commodities.      Thus,  in  the  consumption 
of  wheat,  for  instance,  while  it  makes  a  difference  in  the 
demand  whether  the  price  stands  at  fifty  cents  or  at  a 
dollar  a  bushel,  the  difference  is  not  so  great  as  in  the 
case  of  articles  which  satisfy  less  urgent  wants.     On  the 
other  hand,  a  fall  in  the  price  of  certain  articles,  especially 
luxuries,  is  promptly  followed  by  a  greatly  increased  de- 
mand.   When  changes  in  demand  resulting  from  changes 
in  price  are  relatively  great,  the  demand  is  said  to  be  elastic. 


DEMAND  99 

3.  The  Quantity  demanded  varies  directly  with  the  Gen- 
eral Wealth.  —  In  the  third  place,  if  we  suppose  the  mar- 
ginal utility  of  any  commodity  and  its  price  to  remain  the 
same,  it  is  evident  that  anything  which  increases  the  pur- 
chasing power  of  the  community  will  increase  its  demand 
for  the  commodity.  For  increase  of  wealth,  as  has  been 
explained,  lowers  the  marginal  utility  of  money,  and 
makes  it  possible  to  spend  more  for  other  commodities 
without  losing  that  surplus  of  utility  over  cost  which 
determines  purchases.  As  is  pointed  out  elsewhere,  it  is 
the  general  wealth  of  the  people  of  our  country,  leading 
to  an  increased  demand  for  commodities,  that  offers  the 
special  opportunity  for  abnormal  profits  to  monopolists. 
The  monopoly  price  —  or  the  price  at  which  a  monopo- 
list can  secure  the  greatest  net  returns  —  is  regularly 
higher  in  the  United  States  than  in  the  countries  of 
Europe. 

The  whole  law  of  demand,  then,  may  be  summed  up  in 
a  single  statement  as  follows  :  The  quantity  demanded  varies 
(1)  directly  with  changes  (a)  in  the  marginal  utility  and 
(b)  in  the  purchasing  power  of  the  community,  and  (2)  in- 
versely with  changes  in  price. 

Statistics  of  Private  Consumption.  —  Further  light  is 
thrown  on  the  principles  which  we  have  been  studying  by 
the  actual  facts  regarding  the  expenditures  and  consump- 
tion of  families.  A  detailed  statement  of  the  income  and 
outgo  of  a  family  is  called  a  family  budget.  Careful 
studies  of  such  budgets  have  been  made  in  Prussia  and 
Great  Britain  and  in  some  of  our  own  states,  notably 
Massachusetts  and  Illinois.  On  the  basis  of  the  Prus- 
sian statistics,  the  table  of  percentages  on  the  following 
page  has  been  prepared. 


100       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 


ENGEL'S  LAW. —  PRUSSIA 


ITEMS  OF  EXPENDITURE 

PERCENTAGE  OF  THE  EXPENDITURE  OF  THE 
FAMILY  OF 

A  working- 
man  with  an 
income  of  from 
$225  to  $300 
a  year 

A  man  of  the 
intermediate 
class  (."  mit- 
telstandes") 
with  an  income 
of  from  $450 
to  $600  a  year 

A  person  in 
easy  circum- 
stances  C'des 
wohlstandes") 
with  an  income 
of  from  $750  to 
$1100  a  year 

per  c 

62.0-1 
16.0 
12.0 
5.0- 
2.0' 
1.0 
1.0 

1.0. 

ent 

95.0 

>    5.0 

per  c 

55.0 
18.0 
12.0 
5.0 
3.5^ 
2.0 
2.0 

2.5 

ent 

90.0 
10.0 

per  c 

50.0  i 
18.0 
12.0 
5.0. 
5.5 
3.0 
3.0 

3.5. 

eut 

85.0 
15.0 

2    Clothing  

4.  Firing  and  lighting  .... 
5.  Education,  public  worship,  etc. 
Q    Legal  protection    

7.  Care  of  health  

8.  Comfort,  mental  and  bodily 
recreation  

Total   

100.0 

100.0 

100.0 

The  following  table  permits  a  comparison  between  the 
conditions  obtaining  in  different  countries  :  — 

COMPARATIVE  PERCENTAGES  OF  EXPENDITURES  BY  THE  FAMILIES  OF 
WORKINGMEN  IN  ILLINOIS,  MASSACHUSETTS,  GREAT  BRITAIN, 
AND  PRUSSIA 


ITEMS  OF  EXPENDITURE 

ILLINOIS 

MASSA- 
CHUSETTS 

GREAT 
BRITAIN 

PRUSSIA 

AVERAGE 

Subsistence  .    .    . 
Clothing  .... 
Rent    

41.38 
21.00 
17  49 

49.38 
15.95 
1Q  74 

51.36 
18.12 
13  48 

55.00 
18.00 

10  no 

49.25 
18.27 
15  66 

Fuel    .    .    . 

*>  fi3 

A   QA 

^  ^0 

K  on 

4  fi1 

Sundries  .... 

14.57 

10.73 

13.54 

10.00 

12.21 

Total     .    .    . 

100.00 

100.00 

100.00 

100.00 

100.00 

DEMAND  101 

As  a  result  of  his  study  of  Prussian  family  budgets, 
Dr.  Ernst  Engel,  an  eminent  Prussian  statistician,  laid 
down  the  following  general  laws  of  consumption,  which  is 
sufficiently  illustrated  in  the  tables  just  given  :  — 

As  the  income  of  a  family  increases, 

(1)  The  percentage  of  expenditure  for  food  decreases; 

(2)  The  percentage  of  expenditure  for  clothing  remains 

approximately  the  same  ; 

(3)  The  percentage  of  expenditure  for  rent,  fuel,  and 

light  is  invariable; 

(4)  The  percentage  of  expenditure  for  education,  health, 

recreation,  etc.,  increases. 

From  the  figures  given  in  the  tables  it  is  evident  that 
demand  for  food  in  any  community  is  little  elastic,  since 
enough  for  subsistence  is  required  in  any  case,  and  the 
relative  amount  demanded  by  all  classes  falls  off  rapidly 
as  these  needs  are  satisfied.  On  the  other  hand,  in- 
creased wealth  results  in  an  increasing  demand  for  all  the 
manifold  goods  and  services  that  minister  to  culture 
wants. 

Since  the  satisfaction  of  man's  higher  wants  is  necessary 
to  his  complete  efficiency  as  a  producer,  we  can  understand 
from  the  tables  how  it  is  that  "  the  destruction  of  the  poor 
is  their  poverty."  They  live  in  a  vicious  circle.  The 
poverty  to  which  they  are  born  is  itself  the  bar  to  their 
escape.  Once  free  them  from  this  condition,  and  the 
power  to  perpetuate  their  own  prosperity  is  given  into 
their  hands  ;  for  they  thus  become  more  efficient  as  pro- 
ducers and  more  skilful  in  securing  a  just  share  in  the 
increased  product  of  their  labor. 


102       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

SUMMARY 

1.  Men  seek  in  their  consumption  to  secure  the  greatest  possible 

surplus  of  utility  over  cost. 

2.  The  economic  importance  of  a  commodity  is  determined  by  its 

marginal  utility. 

3.  The  quantity  demanded  varies  directly  with  the  marginal  utility 

of  the  goods  and  the  wealth  of  the  consumers,  and  inversely  as 
the  price. 

4.  Increase  of  fortune  usually  means  an  increase  of  expenditure  for 

the  comforts  and  decencies  of  life. 

QUESTIONS 

1.  Draw  diagrams  roughly  representing  the  initial  utility  and  the 

diminishing  utility  of  some  different  kinds  of  consumption  in 
your  own  case. 

2.  Which  has  the  greater  economic  importance  for  men,  water  or 

gold?  Water  or  wheat?  Why?  Contrast  other  commodities 
in  the  same  way. 

3.  How  do  we  estimate  marginal  utilities  in  everyday  life  ? 

4.  What  would  be  the  relative  effect  upon  demand  for  automobiles 

and  wheat  if  the  prices  of  both  should  fall  proportionally? 
Why  has  the  price  of  copper  remained  high  in  spite  of  the  great 
increase  in  its  supply  ?  How  does  the  sudden  death  of  a  Presi- 
dent affect  the  demand  for  mourning  goods  ?  Why  ? 

5.  What  percentages  of  their  incomes  do  different  persons  in  your 

community  spend  for  the  different  kinds  of  things  mentioned  in 
Engel's  law  ? 

LITERATURE 

See  preceding  chapters.     Also,  on  Engel's  law : — 
Roscher,  W. :  Principles  of  Political  Economy  (Translation),  Vol.  I, 

Ch.  I,  §§  1-6. 
The  Seventh  Annual  Report  of  the  United  States  Commissioner  of 

Labor  gives  the  results  of  other  investigations. 


CHAPTER  IV 
THE  ECONOMY  OF  SPENDING  AND  SAVING 

Two  important  questions  regarding  economy  in  con- 
sumption remain  to  be  studied.  The  first  question  is, 
briefly,  How  can  one's  whole  expenditure  or  consumption 
be  so  distributed  between  the  present  and  the  future  that 
the  greatest  amount  of  satisfaction  will  result  ?  The  sec- 
ond question  assumes  that  the  first  has  been  answered,  and 
asks  how  the  consumption  of  the  present  may  be  so  ordered 
that  it  will  result  in  the  greatest  total  of  satisfactions  ? 
Though  both  questions  really  have  to  do  with  expenditure, 
still  we  commonly  think  of  the  first  as  the  problem  of 
saving,  as  distinguished  from  the  problem  of  spending, 
which  is  represented  in  the  second  question. 

I.   THE  ECONOMY  OF  SAVING 

First  of  all  it  should  be  noted  that  the  proportion  be- 
tween present  and  future  expenditure  conforms  to  the 
general  rule  which  has  already  been  laid  down  as  the  law 
of  the  "economic  order  of  consumption."  We  seek 
always  in  our  expenditure  to  secure  the  greatest  surplus 
of  utility  over  cost ;  hence  we  discontinue  present  expend- 
iture when  we  feel  that  we  can  secure  a  greater  surplus  of 
utility  by  applying  any  remainder  of  our  purchasing  power 
to  future  purchases.  Of  course,  with  many  people  the 
demands  of  the  present  are  so  urgent  and  their  means  so 
limited  that  there  is  little  opportunity  for  any  such  balanc- 

103 


104       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

ing  of  present  and  future  surpluses.  But  whenever  there 
is  any  saving  at  all,  it  proceeds  according  to  the  mental 
comparison  just  explained. 

Hoarding.  —  But  how  are  goods  saved  ?  Manifestly,  we 
may  save  goods  in  such  a  way  that  neither  we  ourselves 
nor  others  can  enjoy  them  in  the  present.  Thus  it  is 
claimed  that  the  peasants  of  France  are  so  distrustful  of 
banks  that  they  lay  by  or  hoard  their  savings  in  secret 
places  about  their  homes.  Such  saving,  though  it  is  not 
the  best,  is  better  than  harmful  or  luxurious  consumption 
in  the  present ;  for  if  the  goods,  for  instance,  money,  be 
stored  away  in  such  a  manner  that  they  will  not  suffer 
harm,  they  may  in  the  end  minister  to  real  and  commend- 
able wants. 

Investment.  —  But  in  modern  times,  with  security  of 
property  guaranteed  by  a  strong  government,  and  with 
easy  opportunities  for  devoting  savings  to  productive 
uses  which  will  return  a  regular  income,  most  provident 
people  prefer  saving  by  investment  to  saving  by  hoarding. 
Moreover,  as  industry  becomes  more  complicated  and  re- 
quires more  and  more  skill  for  successful  management, 
a  greater  number  of  people  prefer  to  intrust  their  savings 
to  the  hands  of  others  rather  than  to  invest  them  directly. 
The  process  is  even  carried  one  step  farther  in  the 
majority  of  cases.  Instead  of  lending  their  savings 
directly  to  those  who  manage  productive  enterprises, 
men  deposit  their  savings,  in  the  form  of  money  or 
credit  instruments,  in  banks,  and  the  banks  in  turn  take 
it  upon  themselves  to  decide  in  what  enterprises  such 
savings  may  be  most  safely  and  profitably  invested. 

The  difference  between  hoarding  and  saving  by  invest- 
ment is,  briefly,  that  in  the  one  case  the  goods  may  ulti- 


THE  ECONOMY  OF  SPENDING  AND   SAVING      105 

mately  be  used  productively  and  economically,  while  in 
the  other  case  the  goods  saved  are  saved  by  being  used  thus 
productively. 

The  fact  that  money  represents  goods  in  general  is 
likely  to  cause  us  to  overlook  the  real  nature  of  saving. 
From  the  individual  standpoint,  saving  means  the  post- 
ponement of  consumption.  When  a  man  saves  five  dollars 
out  of  his  week's  income,  he  is  postponing  to  a  future 
time  the  exercise  of  his  right  to  receive  goods  to  that 
amount  from  his  fellow-beings.  He  may  do  this  either 
by  hoarding  the  money  or  by  lending  it  to  some  one  else. 
But  such  acts  do  not  necessarily  result  in  saving  from  the 
social  standpoint.  Social  saving  means  greater  enjoy- 
ment in  the  future  on  the  part  of  the  community  as  a 
whole.  If  A  lends  to  B  money  with  which  to  buy  a  suit 
of  clothes,  A  individually  has  saved,  but  there  has  been 
no  social  saving,  for  there  will  not  be  more  goods  to  enjoy 
in  the  future  on  account  of  this  act.  But  if,  instead  of 
asking  other  men  to  make  a  suit  of  clothes  for  him,  B  had 
told  them  to  construct  a  machine,  there  would  also  have 
been  social  saving,  since  the  machine  would  make  it  pos- 
sible to  produce  more  goods  in  the  future.  Modern 
societies  save  chiefly  by  bettering  their  facilities  for  pro- 
ducing goods;  the  amount  of  food,  clothing,  etc.,  that 
the  people  of  the  United  States  store  up  for  future  use  is 
comparatively  small. 

We  often  hear  men  talking  as  if  the  man  who  spends 
money  freely  were  a  public  benefactor,  while  the  man  who 
is  not  thus  lavish  is  to  be  regarded  with  reproach.  But 
it  is  plain  from  the  foregoing  that  the  former  is  using  up 
goods  and  services  now,  while  the  latter  may  through  his 
investments  be  improving  the  productive  equipment  of 


106        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

society.  The  one  is  telling  men  to  serve  him  in  his  home, 
in  his  stables,  and  aboard  his  yacht ;  the  other  is  setting 
them  to  work  building  factories  —  he  is  saving  socially. 
It  is  true,  this  may  be  carried  too  far.  Just  as  the  farmer 
may  have  too  many  ploughs  and  wagons,  so  we  as  a  nation 
may  have  built  too  many  railroads  and  cotton  factories 
for  present  needs. 

II.   THE  ECONOMY  OP  SPENDING 

Having  considered  the  first  of  the  two  questions  which 
were  raised  at  the  beginning  of  this  chapter,  we  have  next 
to  consider  the  other,  — the  question  of  how  to  order  one's 
present  consumption  that  the  greatest  good  may  result. 

First  of  all,  for  economy  in  spending,  two  things  are 
essential,  which  we  may  call  (J.)  the  economy  of  right 
choice  and  (.B)  the  economy  of  right  use.  The  economy  of 
right  choice  depends  upon  a  correct  knowledge  of  those 
present  uses  to  which  commodities  may  be  most  advan- 
tageously applied,  while  the  economy  of  right  use  depends 
upon  a  knowledge  of  the  most  efficient  means  of  applying 
the  goods  to  those  uses. 

(JL)  The  Economy  of  Right  Choice.  —  1.  Luxury.  There 
is  a  lack  of  economy  in  consumption,  due  to  a  failure  to 
exercise  right  choice,  when  men  apply  their  means  to  the 
purchase  of  luxuries.  Expenditure  for  luxuries,  or  luxu- 
rious consumption,  is  not  economical  consumption,  because 
it  does  not  adapt  resources  to  their  most  advantageous 
uses.  The  subject  of  luxury  is  a  difficult  one  to  discuss, 
since  a  definition  of  the  thing  itself  is  by  no  means  easy. 
Many  things  are  to-day  easily  obtainable  by  the  poorest 
which  two  centuries  ago  could  be  enjoyed  only  by  the 
most  wealthy  and  powerful.  Such  things  are  never 


THE  ECONOMY  OF  SPENDING  AND  SAVING      107 

thought  of  as  luxuries  in  modern  days,  but  if  their  pos- 
session in  the  olden  time  required  the  exploitation  of  the 
poor  and  did  not  render  their  possessors  able  and  willing 
to  confer  great  social  service  in  return,  we  must  hold  that 
they  were  then  luxuries.  To  the  illiterate  man,  a  library 
is  a  luxury ;  to  the  scientist,  it  may  be  a  necessity  for 
complete  efficiency.  These  illustrations  may  serve  to 
show  the  difficulty  of  reaching  any  simple  and  clear  defi- 
nition of  luxury,  and  the  equally  great  difficulty  of  estab- 
lishing any  universal  principles  by  which  we  may  always 
judge  such  expenditure.  Yet  it  is  possible  to  lay  down 
a  definition  which  implies  a  principle  of  social  economy 
in  expenditure,  and  which  suggests  an  ethical  precept : 
Luxury  consists  in  any  consumption  of  commodities  and  ser- 
vices which  is  seriously  out  of  proportion  to  the  social  service 
that  they  render  possible,  but  which  is  not  of  necessity  di- 
rectly injurious  to  the  consumer.  As  we  have  suggested, 
the  principle  here  indicated  should  be  used  with  caution. 
If  the  possession  of  great  talents  calls  for  large  expendi- 
ture to  render  those  talents  more  efficient,  then  small  con- 
sumption would  be  wasteful,  and  large  consumption  would 
not  be  luxurious. 

But,  it  may  be  asked,  has  not  a  man  the  right  to  do  as  he 
will  with  his  own  ?  And  the  answer  must  be,  Yes,  in  a  very 
full  measure,  if  you  judge  right  solely  by  the  statute  law. 
No  court  had  appointed  Cain  to  the  guardianship  of  Abel. 
But  the  statute  law  follows  only  slowly  and  haltingly  after 
the  growing  sense  of  right  and  duty  as  it  develops  in  the 
race.  The  laws  of  to-day  grant  extreme  rights  of  prop- 
erty and  use,  because  it  has  been  found  that  on  the  whole 
men  have  worked  harder,  produced  more,  and  on  the 
whole  been  happier  when  they  were  given  such  almost 


108        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

unfettered  rights  of  disposing  of  their  product.  Now, 
however,  men  are  becoming  more  socially  inclined.  More 
and  more,  rich  men  and  talented  men  are  coming  to  re- 
gard their  riches  and  their  talents  as  trusts  which  have 
been  committed  to  them,  rather  than  as  possessions  which 
they  may  squander  without  a  thought  for  their  fellows. 
When  this  feeling  of  responsibility,  of  stewardship,  be- 
comes sufficiently  developed,  our  law  may  safely  be 
changed  to  recognize  the  change  in  the  race  idea,  and  to 
compel  the  unsocial  to  feign  the  virtue  if  they  have  it 
not.  Indeed,  save  in  exceptional  instances,  there  may  be 
no  need  for  a  change  in  the  law,  since  public  opinion 
would  be  sufficiently  powerful  to  accomplish  the  purpose 
of  checking  lavish  display. 

Caution.  —  But  we  must  revert  to  our  caution.  Too 
great  penuriousness  is  an  evil  only  less  serious  than  prodi- 
gality. We  must  not  forget  that  a  rational  expansion  in 
the  number  and  variety  of  human  wants  is  necessary  to 
human  progress. 

2.  Harmful  Consumption.  —  In  speaking  of  luxurious 
consumption,  we  have  said  that  it  does  not  necessarily  in- 
volve immediate  and  direct  harm  to  the  consumer  himself. 
When  such  harm  does  result,  it  is  more  usual  to  speak  of 
the  consumption  as  harmful  rather  than  as  luxurious.  It 
goes  without  saying  that  harmful  consumption  calls  for 
the  censure  of  the  economist  no  less  than  for  that  of  the 
ethical  teacher,  since  it  is  in  the  highest  degree  wasteful, 
whether  regarded  from  the  standpoint  of  the  individual  or 
of  society.  When  a  nation  devotes  a  large  amount  of  its 
labor  and  capital  to  the  production  of  commodities  which, 
in  their  consumption,  cause  more  misery  than  happiness, 
and  weaken  the  nation's  future  resources  of  energy  and 


THE  ECONOMY  OF  SPENDING  AND   SAVING      109 

intelligence,  there  is  a  departure  from  economical  consump- 
tion so  serious  as  to  call  for  the  severest  condemnation. 
If  society  would  forego  such  injurious  consumption,  bread 
would  be  cheaper,  higher  wants  would  find  satisfaction, 
and  man  would  be  working  away  from  the  beast's  low 
level  of  sensual  gratification. 

Some  Rules  for  Economy  in  Choices.  —  We  may  exercise 
an  influence  over  the  growth  of  our  own  wants,  in  such  a 
way  that  a  great  real  satisfaction  may  flow  from  a  com- 
paratively small  expenditure.  Thus,  (1)  we  should  culti- 
vate enjoyment  or  consumption  that  is  inclusive  or  inex- 
clusive  rather  than  exclusive  in  its  nature.  It  is  evident 
that  if  a  community  can  cultivate  such  a  love  for  art  that 
its  satisfaction  will  consist  in  viewing  beautiful  pictures 
or  statues  rather  than  in  owning  them  individually,  it  will 
be  possible  to  secure  such  satisfaction  by  joint  purchase 
most  economically.  Again,  (2)  we  should  cultivate  har- 
monious consumption.  We  all  know,  to  take  a  homely 
example,  that  bread  and  butter  together  give  a  greater 
enjoyment  than  would  result  from  the  consumption  of  the 
two  separately.  But  harmony  of  consumption  is  by  no 
means  limited  to  such  simple  cases  as  this.  Whenever  a 
group  of  commodities  produces  in  combination  a  greater 
satisfaction  than  results  from  the  consumption  of  the  same 
commodities  separately,  the  consumption  of  the  group  is 
harmonious  consumption,  and  is  most  economical.  Finally, 
(3)  we  should  cultivate  variety  in  consumption.  The 
greater  the  variety  of  goods  consumed,  the  higher  will  be 
the  marginal  utility  of  the  goods,  and  hence  the  keener  the 
satisfaction  in  their  consumption.  Moreover,  the  wider 
is  the  range  of  one's  likings,  the  more  certain  is  one  to 
find  satisfaction  under  widely  varying  conditions,  as  when 


110       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

travelling  among  strangers.  To  take  a  simple  instance,  a 
family  with  little  variety  of  taste  or  desire  in  the  matter 
of  food  is  at  the  mercy  of  price  changes  within  that  lim- 
ited range  of  food  purchase,  while  those  who  have  culti- 
vated varied  tastes  are  able  to  give  up  the  consumption  of 
any  one  form  of  food,  when  it  becomes  expensive,  without 
great  loss  of  enjoyment.  If  the  American  people  would 
cultivate  a  taste  for  other  kinds  of  bread  than  that  made 
from  wheat  flour,  they  could  get  their  satisfaction  from  the 
other  kinds  of  bread  as  well  as  from  the  wheat  bread  itself 
more  cheaply  than  they  now  do. 

(B)  The  Economy  of  Right  Use.  — Hitherto,  we  have  been 
speaking  of  a  lack  of  economy  due  to  the  failure  to  appro- 
priate objects  and  services  to  their  most  advantageous 
uses.  But  even  when  they  are  so  applied,  there  is  gen- 
erally some  waste  in  the  method  of  using  them.  It  is 
even  probable  that  more  waste  arises  in  this  way  than  in 
the  other,  though  the  harm  to  character  is,  of  course,  in- 
calculably less. 

The  Economic  Importance  of  Housekeeping.  —  It  is  here 
that  the  great  influence  of  the  wife  and  mother  can  be 
seen.  Probably  not  less  than  three-fourths  of  the  income 
of  the  average  family  depends,  for  the  economy  of  its  ex- 
penditure, upon  the  woman  to  whom  the  affairs  of  the 
household  are  intrusted.  The  importance  of  this  consid- 
eration has  often  been  overlooked.  Americans,  in  partic- 
ular, have  incurred  the  reproach  of  wasteful  methods  of 
providing  food  for  the  family.  Such  waste  may  result 
(1)  from  the  choice  of  foods  that  contain  relatively  little 
nutriment ;  (2)  from  the  choice  of  foods  not  well  suited 
to  the  particular  needs  of  the  consumers ;  (3)  from  fail- 
ure to  utilize  all  the  material  that  is  purchased  and  that 


THE  ECONOMY  OF  SPENDING  AND   SAVING      111 

would  supply  nutriment;  (4)  from  bad  preparation  of 
the  food ;  (5)  from  failure  to  utilize  to  the  full  the  fuel 
devoted  to  cooking.  Similar  wastes  are  repeated  in  the 
matter  of  clothing.  It  has  been  calculated  by  careful 
investigators,  that  through  these  channels  there  is  a  waste 
in  the  ordinary  family  income  of  over  one-tenth  of  the 
total.  If  the  calculation  be  correct,  we  may  conclude  that 
a  stoppage  of  these  wastes  would  enable  the  average  family 
to  secure  the  same  enjoyments  with  a  working  day  one 
hour  or  more  shorter  for  the  workers  of  the  family,  or  to 
increase  the  sum  of  their  enjoyments  by  more  than  a  tenth 
without  any  increase  in  the  amount  of  work  required. 

SUMMARY 

1.  Economy  in  consumption   requires  an  economical  balancing  of 

expenditures  between  the  present  and  the  future,  and  an  eco- 
nomical ordering  of  present  expenditure  :  the  one  is  the  economy 
of  "  saving  " ;  the  other,  the  economy  of  "  spending." 

2.  Saving,  unless  it   is  merely  hoarding,  is  really  spending  for  the 

future.  Therefore,  a  wise  balancing  of  present  and  future  is 
secured  by  the  mean  between  prodigality  and  parsimony.  The 
prodigal  is  not  a  public  benefactor. 

3.  Economy  in  present  consumption  requires  right  choices  and  right 

uses  of  the  things  chosen. 

4.  Luxury  and  harmful  .consumption  both  violate  the  rule  of  right 

choices.  Inclusive,  harmonious,  and  varied  consumption  is  most 
economical. 

5.  The  economy  of  right  uses  depends  largely  upon  the  home  maker. 

QUESTIONS 

1.  Discuss  the  fallacy :  "Spending  money  makes  trade  good."    Why 

and  how  does  the  man  who  saves  spend  ?  Through  what  agency 
is  this  spending  usually  done  in  modern  society  ? 

2.  What  two  general  principles  must  be  observed  in  economizing  on 

present  expenditure? 


112        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

3.  What  is  luxury?    What  are  its  economic  effects?    How  does  it 

differ  from  harmful  consumption  ? 

4.  Explain  by  illustrations  the  economy  of  variety  in  consumption. 

Of  harmonious  consumption.    Of  inclusive  consumption. 

LITERATURE 

See  preceding  chapters.     Also  :  — 

Atkinson,  E. :  The  Science  of  Nutrition. 

Atwater,  W.  O. :  "  Food  Waste  in  American  Households  "  (article  in 

Forum  for  September,  1893). 
Devine,  E.  T. :  Economics,  Ch.  VI,  pp.  97-99. 
Hamilton,  J.  H. :  Savings  and  Savings  Institutions,  pp.  31-38. 
Patten,  S.  N. :  Dynamic  Economics,  pp.  39-49. 


PART   II.  — PRODUCTION 

CHAPTER  I 
INTRODUCTORY 

Why  Production  should  be  studied  Next.  —  We  have 
made  human  wants,  consumption,  and  demand  the  first 
subjects  of  our  study  of  economic  theory  because  it  is  from 
these  that  all  other  economic  phenomena  take  their  rise. 
We  have  seen  why  men  exert  themselves  in  the  work  of 
production.  The  next  logical  step  is  to  inquire  how  men 
go  about  the  work  of  production.  We  have  studied  the 
cause  and  the  laws  of  demand.  We  have  next  to  make 
a  similar  inquiry  regarding  supply.  Our  present  study 
therefore  is  of  the  general  subject  of  production. 

What  Production  Is.  —  Just  as  consumption  means  the 
destruction,  not  of  matter,  but  of  the  particular  utilities 
of  certain  forms  of  matter,  so  production  means  the  crea- 
tion, not  of  matter,  but  of  utilities.  Man  cannot  create 
matter.  Neither  the  farmer  nor  the  merchant  adds  one 
atom  to  the  existing  material  of  the  earth.  Yet  both  are 
called  producers,  and  properly  so.  What,  then,  do  they 
produce  ?  Think  about  it  and  you  will  discover  that  they 
are  producing  quantities  of  utilities  and  nothing  else. 
And  how  do  they  do  so  ?  Simply  by  putting  things  in 
places  appropriate  to  that  purpose.  "This  one  opera- 

i  113 


114        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

tion,"  says  John  Stuart  Mill,  "  of  putting  things  into  fit 
places  for  being  acted  upon  by  their  own  internal  forces, 
and  by  those  residing  in  other  natural  objects,  is  all  that 
man  does  or  can  do  with  matter." 

All  Production  essentially  the  Same.  — It  has  seemed  to 
some,  even  among  economists  of  an  earlier  time,  that  the 
farmer  is  more  truly  a  producer  than  the  manufacturer, 
and  the  manufacturer  than  the  merchant ;  but  careful 
thought  discloses  the  fallacy  of  such  a  view.  All  indus- 
trial classes  alike  produce  one  or  more  of  the  four  sorts  of 
utility  which  we  have  described,  and  they  do  so  by  chang- 
ing the  relations  of  things  in  time  or  space.  The  farmer 
changes  the  position  of  grains  of  corn  by  dropping  them 
into  the  earth.  Then  he  removes  weeds  and  throws  earth 
about  the  rising  stalks.  Thus  man's  acts  in  changing  the 
relations  and  position  of  things,  aided  by  nature's  mate- 
rials and  forces,  result  in  more  corn  for  human  consump- 
tion. The  manufacturer  in  the  same  way  changes  the 
position  of  pieces  of  matter,  and,  aided  by  natural  forces 
within  and  without  the  object  of  production,  he  causes 
matter  to  assume  a  form  which  fits  it,  or  better  fits  it,  for 
human  needs.  So,  too,  the  merchant  changes  the  places 
of  things  from  where  they  are  less  useful  to  where  they 
are  more  useful,  or  holds  them  in  one  place  until  a  change 
of  external  circumstances  gives  them  a  greater  time  utility. 
He  is  producing  utilities  as  truly  as  is  the  farmer  or  the 
manufacturer.  Of  course  it  is  possible  that  the  utilities 
actually  produced  by  merchants  could  be  produced  with 
a  smaller  expenditure  of  economic  force  than  they  are  at 
present,  and  that  saving  could  be  effected  by  a  better 
organization  of  the  work  of  production.  Again,  it  may 
be  that  the  merchant  may  now  and  then  secure  a  larger 


INTRODUCTORY  115 

return  for  the  production  of  a  given  quantity  of  social 
utility  than  does  the  farmer.  But  all  this  affords  no  jus- 
tification for  the  popular  impression  that  his  work  is  really 
less  productive  in  its  nature  than  is  that  of  any  other 
industrial  class.  The  only  difference  is  in  the  kind  of 
utility  that  the  different  classes  are  engaged  in  producing. 
Finally,  it  must  be  remembered  that  in  the  same  way  the 
physician,  the  teacher,  and  all  others  who  are  engaged  in 
rendering  personal  services,  are  creating  utilities,  and  are 
therefore  producers. 

Production,  then,  we  may  define  as  the  creation  of  utili- 
ties by  the  application  of  man's  mental  and  physical  powers 
to  the  physical  universe,  which  furnishes  materials  and 
forces.  This  application  of  man's  powers  we  call  labor. 

We  have  already  defined  goods  and  economic  goods.  It 
remains  for  us  here  to  call  attention  to  the  fact  that  those 
quantities  of  utility  which  result  from  labor  are  economic 
goods,  but  that  not  all  economic  goods  are  to  the  same  ex- 
tent the  result  of  labor.  One  may  pick  up  a  diamond  or 
a  nugget  of  gold  upon  which  one  has  stumbled :  in  such 
a  case  it  can  hardly  be  said  that  the  economic  good  is  the 
result  of  labor  at  all.  But  even  in  such  rare  cases  it  must 
be  remembered  that  while  the  one  diamond  or  the  one 
nugget  may  have  required  no  labor  in  getting,  yet  the 
whole  stock  of  such  goods  is  the  result  of  toil  and  suffer- 
ing and  privation  for  which  the  value  of  our  diamonds 
and  gold,  it  is  frequently  said,  does  not  represent  any- 
thing like  a  proper  recompense. 

There  is  one  clearly  marked  case  of  value  creation  which 
is  not  wealth  production.  The  land  on  which  New  York 
and  Chicago  stand  could  have  been  purchased  only  a  few 
centuries  ago  for  a  very  small  sum  of  money.  The  great 


116       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

value  which  that  land  now  has  is  to  a  considerable  degree 
the  result  of  human  labor,  but  much  of  it  is  due  to  the 
great  increase  in  population,  which  of  itself  represents  no 
idea  of  labor.  Such  value  is  a  product  of  social  aggregation, 
not  of  individual  effort.  The  question  of  the  expediency 
of  allowing  individuals  to  appropriate  these  individually 
unearned  increments  of  value  will  be  discussed  later.  Here 
it  concerns  us  only  to  notice  that  such  unearned  incre- 
ments exist ;  in  other  words,  that  there  is  such  a  thing  in 
the  world  as  value  creation  which  is  not  at  the  same  time 
wealth  production. 

Individual  and  Social  Wealth.  —  This  distinction  be- 
tween the  individual  and  the  social  standpoint  runs  all 
the  way  through  economics,  and  it  is  particularly  impor- 
tant in  the  case  of  the  conception  of  wealth  or  economic 
goods.  What  is  wealth  to  the  individual  may  not  be 
wealth  to  society,  and,  on  the  other  hand,  what  is  wealth 
to  society  may  not  be  within  the  ownership  of  an  individ- 
ual. Thus  a  mortgage  is  wealth  to  the  individual  who 
holds  it,  but  it  is  not  a  part  of  social  wealth,  since  if  the 
claim  for  which  it  stands  is  extinguished,  society  is  neither 
richer  nor  poorer.  The  case  is  the  same  with  bonds  issued 
by  a  city,  a  state,  or  a  nation. 

Productive  Elements  often  Overlooked.  —  There  are  many 
important  facts  regarding  production  which  are  often  over- 
looked. Thus  we  are  likely  to  forget  that  even  to-day  a 
large  part  of  production  is  household  production,  and  is 
not  designed  for  the  market  place  at  all.  The  labor  of  at 
least  half  the  women  of  the  country  is  expended  in  pro- 
ducing material  good  things  for  the  use  of  producers. 

Again,  we  are  likely  to  overlook  the  fact  that  in  the 
country,  where  over  one-half  of  the  population  of  the 


INTRODUCTORY  117 

United  States  lives  and  works,  there  is  annually  produced 
a  vast  amount  of  goods  which  are  destined  not  for  the 
market  but  for  home  consumption.  Vegetables,  small 
fruits,  —  cultivated  and  wild, — butter,  eggs,  meat,  fish 
caught  in  public  waters,  and  game  are  some  of  the  things 
that  occur  most  readily  to  the  mind. 

Considerations  of  this  character  show  the  great  need  of 
caution  in  attempting  to  compare  the  annual  production 
of  one  country  with  that  of  another,  or  to  compare  the 
annual  production  of  the  same  country  at  different  periods. 
Household  production  is  becoming  relatively  less  impor- 
tant, while  the  production  of  things  for  the  market,  the 
value  of  which  is  readily  measured  in  money,  is  constantly 
gaining  in  importance.  Hence,  apparent  annual  produc- 
tion—  the  production  of  things  which  have  a  market 
price  set  upon  them  —  is  increasing  more  rapidly  than  is 
the  real  annual  production.  The  result  is  a  tendency  to 
overestimate  our  progress  and  even  to  count  as  progress 
what  may  not  be  progress  at  all.  Thus,  should  boarding- 
house  and  hotel  life  displace  private  housekeeping,  annual 
production  might  appear  to  increase  as  a  result  of  the 
change,  though  the  real  wealth  and  income  of  the  country 
would  evidently  be  affected  in  no  such  degree. 

Still  further  care  must  be  exercised  in  studying  census 
estimates  of  wealth.  These  estimates  are  ordinarily  made 
in  terms  of  money.  Now  if  commodities  are  very  abun- 
dant, their  price,  other  things  being  equal,  will  be  low, 
though  the  real  wealth  of  the  country  is  great.  If,  for 
instance,  the  quantity  of  cotton  cloth  produced  doubles 
between  two  census  periods,  while  the  price  falls  one-half, 
the  total  value  of  the  product  will  appear  in  the  census 
estimates  as  equal  in  the  two  cases,  though  it  is  evident 


118       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

that  society  in  the  second  period  has  twice  the  amount  of 
this  valuable  commodity. 

Over-production  and  Under-consumption.  —  It  is  not  un- 
common to  find  men  expressing  a  belief  in  the  possibility 
of  general  over-production.  Still  more  common  is  it  for 
men  to  hold  views  which  could  only  be  correct  if  general 
over-production  were  a  possibility.  Even  some  ecoro- 
mists  a  century  ago  fell  into  the  same  error.  By  general 
over-production  is  meant  a  production  of  commodities  in 
general  beyond  the  needs  of  society.  Careful  thought 
will  show  at  once  the  absurdity  of  such  an  idea.  The 
purpose  of  production,  as  we  have  seen,  is  consumption. 
Manifestly,  there  has  never  been  a  time  when  more  eco- 
nomic goods  were  produced  than  men  really  needed  to 
satisfy  their  legitimate  wants.  On  the  contrary,  there 
has  never  been  enough  produced  for  this  purpose.  Some- 
times, indeed,  production  moves  forward  unevenly,  and 
an  undue  amount  of  labor  and  capital  are  for  a  time 
devoted  to  producing  particular  commodities;  but  until 
all  men  are  well  fed,  well  clothed,  and  well  housed,  and 
furnished  with  material  appliances  for  their  higher  life, 
such  as  books  and  pictures,  it  will  be  a  manifest  absurdity 
to  talk  about  general  over-production  as  a  possibility. 
When  there  is  an  almost  universal  difficulty  in  disposing 
of  goods,  the  chief  cause  is  not  over-production  but  under- 
consumption. Men  want  the  goods,  but  they  cannot  at 
the  time  dispose  of  their  services,  and  consequently  lack 
the  purchasing  power  that  would  enable  them  to  satisfy 
their  wants.  When  any  class  of  goods  is  produced  in 
such  quantities  that  the  price  falls  below  the  cost,  we 
may  say  that  there  is  over-production  of  these  goods. 
Such  over-production  is  not  uncommon.  It  is  one  of  the 


INTRODUCTORY  119 

unpleasant  features  of  our  complex  organization  of  eco- 
nomic society  that  its  parts  do  not  always  work  together 
harmoniously.  Producers  are  more  and  more  separated 
in  time  and  space  from  those  who  are  to  consume  their 
products.  It  follows  that  only  the  shrewdest  producers 
can  calculate  with  any  approach  to  accuracy  how  intense 
will  be  the  wants  for  their  goods,  and  in  what  quantities 
rival  producers  will  furnish  goods  to  the  market.  Mis- 
takes in  judgment  result  in  over-production  in  particular 
industries,  and  over-production  in  a  few  industries  often 
leads  to  the  spread  of  doubt  and  uncertainty  throughout 
the  business  world.  Then  men  in  their  fear  restrict  pro- 
duction and  thus  incidentally  close  the  market  for  labor. 
Laborers  seeking  and  failing  to  find  regular  employment 
lose  their  purchasing  power,  with  the  result  that  the  under- 
consumption spreads  all  along  the  line,  and  society  passes 
through  what  is  called  an  industrial  crisis  or  panic.  Such 
crises  were  startlingly  regular  during  the  nineteenth  cen- 
tury, the  greater  ones  coming  at  intervals  of  about  twenty 
years,  with  minor  ones  in  the  alternating  ten-year  intervals. 

The  explanation  of  crises  here  given  is  the  one  usually  ac- 
cepted by  economists,  but  there  are  two  other  explanations 
that  should  be  mentioned.  Some  writers  regard  the  unequal 
distribution  of  wealth  as  the  fundamental  cause.  If  wages  do 
not  rise  in  proportion  to  the  general  increase  in  wealth,  it  is 
argued,  the  mass  of  the  consumers,  who  are  wage-earners,  will 
lack  the  means  to  purchase  the  goods  produced.  Again,  other 
writers  emphasize  the  monetary  aspects  of  crisis.  The  crisis 
of  1893,  for  example,  is  by  some  regarded  largely  as  a  monetary 
disturbance. 

Production  and  Sacrifice.  —  Consumption  regularly  af- 
fords satisfaction.  Production  as  regularly  requires 


120        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

sacrifice  and  exertion.  We  should  recall  here,  what  we 
have  already  noted  in  studying  consumption,  that  the 
balancing  of  the  satisfaction  of  wants  derived  from  con- 
sumption against  the  exertion  and  sacrifice  required  by 
production  lies  at  the  very  centre  of  all  economic  thought. 
It  is  true  that  much  labor  seems  in  itself  so  pleasurable 
that  it  affords  its  own  satisfaction.  But  if  such  labor  is 
not  sufficient  to  produce  the  goods  that  society  demands, 
other  labor  which  does  not  contain  its  own  reward  must 
be  applied  to  production,  and  the  same  reward  will  be 
paid  by  society  for  all  labor  applied  to  that  end.  In  most 
cases,  however,  it  will  be  found  on  investigation,  the 
pleasure  comes  rather  from  the  actual  or  anticipated 
result  of  the  labor  rather  than  from  the  labor  itself. 
Again,  when  we  consume  to-day  less  than  we  have  means 
to  consume,  with  the  object  of  greater  production  in 
future  time,  we  are  aiding  in  production  by  abstinence 
from  a  possible  pleasure.  True,  in  such  cases  we  hope 
to  get  in  the  future  a  satisfaction  that  will  outweigh  the 
present  unsatisfied  feeling,  but  the  unsatisfied  feeling  is 
present  with  us  and  must  be  endured  if  we  are  to  con- 
tribute to  production. 

The  Production  of  Goods  and  Services.  —  In  what  follows 
we  shall  treat  the  production  of  material  goods  and  services 
together,  since  there  is  little  essential  difference  between  the 
two  forms  of  production.  It  is  worth  noting,  however,  that 
the  proportion  of  human  effort  devoted  to  the  production  of 
commodities  and  services  respectively  varies  with  the  progress 
of  civilization.  In  early  stages,  when  only  the  most  pressing 
wants  are  either  felt  or  satisfied,  men  perform  for  themselves 
such  simple  services  as  are  required.  It  is  only  later  that 
there  arises  a  want  for  such  personal  services  as  call  for  special 
training.  The  social  order  gradually  increases  in  complexity, 


INTRODUCTORY  121 

and  as  a  result  of  new  wants  and  increased  means  of  satisfy- 
ing them,  division  of  labor  among  men  makes  a  place  for  the 
singer  and  poet,  the  physician  and  priest,  and  for  other  classes 
who  are  engaged  in  producing  personal  services.  As  the  pro- 
duction of  material  goods  becomes  better  organized,  requiring 
less  proportionate  human  effort,  greater  numbers  of  people  will 
find  it  profitable  to  specialize  their  training  and  effort  toward 
rendering  personal  service  of  one  sort  or  another  to  society. 

SUMMARY 

1.  Production  means  the  creation,  not  of  things,  but  of  utilities, 

by  the  application  of  man's  powers  to  the  physical  universe. 
This  application  of  man's  power  is  labor. 

2.  Individual  wealth  is  not  always  social  wealth. 

3.  Many  productive  elements,  such  as  woman's  work  in  the  house- 

hold, and  the  gathering  of  natural  products  for  home  use,  are 
often  overlooked. 

4.  There  can  be  no  general  over-production.     What  is  thought  of 

when  that  expression  is  used  should  rather  be  called  under- 
consumption. 

5.  With  advancing  civilization,  an  increasing  proportion  of  human 

energy  is  devoted  to  rendering  specialized  personal  services. 

QUESTIONS 

1.  Define  production.     Compare  the  definition  of  consumption  with 

that  of  production. 

2.  Why  and  how  is  the  physician  a  producer?    The  teacher?    The 

actor? 

3.  Mention  instances  of  individual  wealth.      Of  social  wealth.     Do 

all  your  examples  belong  to  both  classes? 

4.  As  cities  increase  in  size,  the  value  of  street  railway  franchises 

regularly   increases.      Is    this   value   a  result  of    production? 
Explain. 

5.  What  utilities  are  produced  and  consumed  in  your  home  which 

do  not  have  a  money  value  put  upon  them? 

6.  Germany  owns  her   railways.     How  would  this  fact  bear  upon 

census  estimates  of  the  wealth  of  the  German  people  as  com- 


122       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

pared  with  similar  estimates  of  the  wealth  of  the  people  of  the 
United  States? 

7.  What  is  meant  by  the  expression  "  over-production  "  ?    Is  such  a 

thing  possible  ?    What  is  it  that  is  commonly  mistaken  for  gen- 
eral over-production  ? 

8.  Show  by  a  detailed  explanation  how  it  is  that  more  men  are  en- 

gaged in  rendering  personal  services  than  was  the  case  in  earlier 
days. 

LITERATURE 

For  a  general  discussion  of  the  subject  of  production,  consult  any 
standard  work  on  Economics.  A  considerable  number  of  these 
are  given  in  the  Appendix.  Also  :  — 

Marshall,  A. :  Principles  of  Economics,  Bk.  II,  Ch.  II,  §§  1  and  2. 

Mayo-Smith,  R. :  Statistics  and  Economics,  Chs.  Ill,  IV,  and  V. 

Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  I,  Ch.  I,  §§  1  and  2. 


CHAPTER  II 
THE  FACTORS  OF  PRODUCTION 

The  Three  Factors. — Three  things  contribute  to  produc- 
tion as  it  is  carried  on  to-day.  They  are  therefore  called 
the  factors  of  production.  Of  these,  two  are  called  original 
or  primary  factors,  because  they  exist  in  the  very  earliest 
forms  of  production,  and  because  it  is  from  them  that  the 
third  factor  is  derived.  These  two  factors  are  land,  or 
nature,  and  labor.  Of  these,  in  turn,  we  may  notice  that 
one  is  passive,  while  the  other  is  active.  In  other  words, 
it  is  primarily  labor,  acting  upon  nature,  that  produces 
wealth.  From  this  action  of  labor  upon  nature,  followed 
by  postponement  of  the  enjoyment  of  the  result  of  the 
labor,  comes  capital,  which  we  therefore  call  a  secondary 
or  derived  factor.  That  is,  it  is  secondary  to  nature  and 
labor,  and  is  derived  from  them. 

NATURE  OR  LAND 

Meaning  of  the  Term. — Under  the  term  "nature"  we  here 
include  all  the  material  things  furnished  directly  by  her 
hand,  together  with  all  the  natural  forces  used  in  produc- 
tion,—  the  power  of  the  wind,  the  movement  of  water, 
gravitation,  cohesion,  etc.  Some  of  these  materials  and 
forces  are  furnished  in  unlimited  quantities,  and  are  there- 
fore free  goods.  It  is  common  in  economics  to  use  the 
word  "  land  "  instead  of  "  nature,"  because  of  all  the  gifts 
of  nature  it  is  land  with  which  we  have  chiefly  to  do  in 

123 


124       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

our  science.  But  it  must  be  remembered  that  the  word 
"  land  "  in  this  use  has  the  very  broad  meaning  which  we 
have  here  given  it.  To  avoid  any  possibility  of  confusion 
some  economists  have  used  the  term  "natural  agents," 
when  the  broader  meaning  is  intended. 

What  Land  does  for  Production.  —  By  analysis  we  learn 
that  the  service  of  land  to  production  is  not  a  single  or  a 
simple  thing,  but  that  it  usually  renders  three  distinct 
services.  In  the  first  place  (1)  it  furnishes  standing  room,  or 
situs.  It  gives  men  something  upon  which  they  may  rest 
and  move  about  while  conducting  productive  processes. 
Moreover,  it  enables  them  to  utilize  the  natural  forces 
which  go  with  the  land  itself.  Mere  space  is  often  a 
source  of  great  value,  as  can  be  seen  in  the  case  of  city 
real  estate.  As  a  continually  increasing  proportion  of  a 
growing  population  dwells  in  cities,  this  first  service  ren- 
dered by  land  is  becoming  more  important.  In  the  second 
place,  (2)  land  contains  those  elements  needed  by  plant  life, 
and  thus  renders  a  service  to  agriculture.  We  call  this 
property  of  the  land  its  "  fertility."  Finally,  (3)  land  con- 
tains natural  products  below  its  surface,  such  as  coal,  gas, 
petroleum,  iron,  silver,  and  gold.  Man  does  not  create 
these  natural  treasures  nor  give  direction  to  nature  in 
their  formation.  Some  nations  have  deemed  it  unfair 
that  they  should  become  the  property  of  individuals,  and 
have  therefore  treated  them  as  a  common  heritage,  exact- 
ing a  rent  or  royalty  for  the  opportunity  to  exploit  them. 
This  is  perhaps  generally  the  case  to-day  on  the  continent 
of  Europe;  but  English  law,  with  its  inclination  to  the 
exaggeration  of  private  rights,  has  long  established  the 
principle  that  he  who  owns  the  surface  owns  downward 
to  the  centre  of  the  earth  and  upward  to  the  sky. 


THE  FACTORS   OF  PRODUCTION  125 

The  Law  of  Diminishing  Returns  from  Natural  Agents.  — 
One  of  the  most  fundamental  and  far-reaching  laws  in 
economics  is  that  which  describes  the  result  of  investing 
labor  and  capital  upon  land  or  other  natural  agents.  This 
law,  known  as  the  law  of  diminishing  returns,  will  repay 
careful  thought  and  study. 

Every  farmer  is  naturally  desirous  of  reaping  the  largest 
possible  return  from  his  expenditure  of  labor  and  capital 
upon  his  land.  Yet  this  very  statement  implies  that  there 
is  a  limit  beyond  which  further  expenditure  will  be  un- 
profitable. Let  us  see  why  this  limit  exists,  and  how  it  is 
determined.  Suppose  the  case  of  an  acre  of  land  which  a 
fanner  intends  to  "  put  into  "  potatoes.  The  field  would 
yield  some  crop  even  if  it  were  hurriedly  and  poorly 
ploughed,  if  no  fertilizer  were  used,  and  no  care  were  taken 
to  prevent  the  growing  vines  from  destruction.  Yet  the 
farmer  knows  that  further  expenditure  of  labor  and  capital 
will  result  in  a  much  larger  crop,  and  that,  if  prices  are 
good,  the  increased  crop  will  fully  repay  the  increased 
outlay.  If  we  were  to  inquire  more  particularly  from  the 
farmer  as  to  his  opinion  regarding  the  possibilities,  we 
should  get  from  him  something  like  the  following 
estimate  :  — 

An  invest-  would  give  a  total  or  an  average  per 

ment  of  return  of  dollar  invested  of 

$5  40  bushels 

10  100  " 

15  165  " 

20  200  " 

25  225  "                             9 

30  240  "                             8 

35  245  "                             7 


126       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

and  so  on.  Now  an  examination  of  these  figures  will  show 
that  a  doubling  of  the  expenditure  from  $5  to  $10  results 
in  more  than  a  doubling  of  the  product,  and  that  similarly 
the  increase  in  the  product  is  more  than  proportionate  to 
the  increase  in  expenditure  in  the  case  following.  So, 
too,  there  is  an  increase  in  the  product  in  each  of  the  other 
cases  given ;  but  notice  that  when  the  expenditure  is  in- 
creased from  $15  to  $20,  an  increase  of  one-third,  the 
increase  in  the  product  is  only  from  165  bushels  to  200 
bushels,  an  increase  of  only  a  little  more  than  one-fifth, 
and  that  in  the  same  way  in  the  following  case,  increasing 
the  expenditure  by  one-fourth  results  in  an  increase  of 
product  of  only  one-eighth,  and  so  on.  In  other  words, 
up  to  a  certain  point  an  increase  of  expenditure  results  in 
a  proportionate  or  more  than  proportionate  increase  in 
return,  while  after  that  point  has  been  reached,  further 
increase  in  expenditure  results  in  less  than  a  proportionate 
increase  in  the  return.  If  it  were  not  for  this  fact,  there 
would  be  no  limit  to  the  amount  of  labor  and  capital  which 
the  farmer  could  profitably  employ  in  the  cultivation  of 
the  acre  of  land.  And  the  fact  that  farmers  are  every- 
where strictly  limited  as  to  the  amount  of  such  profitable 
expenditure  is  complete  proof  that  such  a  point  of  dimin- 
ishing returns  exists  in  the  application  of  labor  and  capital 
to  natural  agents. 

It  will  appear  on  reflection  that  the  farmer  will  not 
necessarily  discontinue  his  expenditure  upon  the  land  at 
the  point  at  which  the  product  begins  relatively  to  dimin- 
ish. The  limit  of  profitable  expenditure  will  depend  upon 
the  price  of  the  product,  which  of  course  cannot  be  exactly 
known  at  the  time  of  planting.  Thus  at  a  price  of  ten 
cents  a  bushel,  the  farmer  would  lose  absolutely  in  all 


THE  FACTORS  OF  PRODUCTION  127 

except  the  second,  third,  and  fourth  cases  in  our  illustra- 
tion, and  he  would  make  a  surplus  only  in  the  third  case. 
At  a  price  of  nine  cents  a  bushel,  he  could  not  afford  to 
raise  the  crop  at  all.  On  the  other  hand,  at  a  price  of 
fifty  cents  a  bushel,  he  could  afford  to  expend  $30  upon 
the  acre,  since  the  last  $5  of  expenditure  would  yield  a 
return  of  fifteen  bushels,  worth  $7.50,  or  $2.50  more  than 
the  amount  expended  in  labor  and  capital.  At  a  still 
higher  price  he  could  afford  possibly  to  expend  more  labor 
and  capital  in  the  cultivation,  the  amount  depending  upon 
the  rapidity  with  which  the  proportionate  return  of  the 
product  decreased  beyond  the  point  covered  by  our  illus- 
tration. Indeed,  in  the  cases  assumed  there  are  only  four 
prices,  ten  to  twelve  cents,  inclusive,  at  which  the  point  of 
diminishing  returns  would  correspond  with  the  point  at 
which  profitable  expenditure  would  cease.  We  may, 
therefore,  say  that  there  are  two  ways  in  which  returns 
diminish  as  expenditure  increases :  there  is  a  diminishing 
return  from  the  point  of  view  of  the  product,  and  there  is 
a  diminishing  return  also  from  the  point  of  view  of  the 
value  of  the  product.  The  second  is  of  course  decisive 
with  the  farmer,  but  this  itself  is  due  to  the  diminishing 
return  measured  in  terms  of  the  product. 

A  further  point  remains  to  be  particularly  noted.  An 
imperfect  understanding  of  the  nature  of  the  law  has  led 
at  times  to  the  conclusion  that  as  population  increases  it 
becomes  increasingly  harder  to  secure  the  means  of  sub- 
sistence from  the  soil.  But  this  conclusion  is  at  variance 
not  only  with  the  known  facts  of  the  history  of  society, 
but  also  with  the  law  itself  when  the  law  is  properly 
stated.  It  would  be  a  valid  conclusion  if  the  point  of 
diminishing  returns  remained  everywhere  at  the  same 


128        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

point  from  year  to  year  and  from  generation  to  genera- 
tion. But  we  all  know  how  far  from  the  truth  this  last 
assumption  is.  The  art  of  agriculture  is  constantly  im- 
proving as  a  result  of  invention  and  the  discovery  of  bet- 
ter methods  and  processes,  and  every  improvement  makes 
it  possible  to  secure  a  greater  crop  without  a  greater 
expenditure ;  in  other  words,  every  such  improvement 
pushes  forward  the  point  of  diminishing  returns.  The 
law  of  diminishing  returns  still  holds  true.  There  is  still 
a  point  beyond  which  further  investment  of  labor  and 
capital  upon  an  acre  of  land  will  yield  a  less  than  propor- 
tionate return,  but  that  point  is  not  now  reached  so  soon 
as  before. 

We  are  now  ready  for  a  formal  statement  of  the  law 
which  we  have  been  discussing.  At  any  given  time,  there 
is  a  point  in  the  investment  of  labor  and  capital  upon  natural 
agents  beyond  which  further  investment  yields  a  less  than 
proportionate  return. 

We  have  taken  for  our  illustration  the  case  of  labor  and 
capital  expended  in  agriculture.  But  the  law  is  equally 
true  of  the  expenditure  of  labor  and  capital  upon  land  or 
other  natural  agents  in  the  case  of  mining,  manufacturing, 
and  commerce.  The  only  difference  is  that  in  these 
industries  greater  amounts  of  labor  and  capital  may  be 
expended  upon  a  given  unit  of  land,  —  say  an  acre, — 
before  the  point  of  diminishing  is  reached,  than  is  the 
case  in  agriculture. 

It  is  possible  to  look  upon  the  law  of  diminishing  returns 
from  other  points  of  view  than  the  one  here  taken.  For  ex- 
ample, instead  of  taking  an  acre  of  land  as  a  unit  and  suppos- 
ing successive  amounts  of  labor  and  capital  to  be  added  to  it, 
we  might  have  considered  the  farmer  himself  as  the  unit,  giving 


THE  FACTORS   OF  PRODUCTION  129 

Mm  successive  amounts  of  land,  labor,  and  capital  to  manage. 
In  this  case  we  should  also  have  found  at  first  an  increasing 
and  then  a  diminishing  return.  As  still  other  points  of  view 
are  possible,  it  is  important  to  adhere  to  one  standpoint  in 
comparing  different  lines  of  industry. 

LABOR 

Definition.  —  The  second  of  the  primary  or  original  fac- 
tors in  production  is  labor.  Labor  is  human  exertion  of 
mind  or  body  undergone  with  the  object  of  creating  utilities. 

A  common  classification  distinguishes  mental  from 
physical  labor.  In  making  this  distinction  it  is  important 
to  bear  in  mind  that  from  the  purest  instance  of  mental 
labor  to  the  purest  instance  of  physical  labor  there  is 
always  some  mixing  of  both  forms.  The  philosopher 
must  labor  with  hand  or  tongue  if  he  would  give  the 
results  of  his  thought  to  the  world,  and,  on  the  other 
hand,  even  the  ditch  digger  can  by  no  means  do  his  work 
without  the  exercise  of  intelligence. 

We  must  never  forget  that  labor  is  not  an  end  in  itself, 
but  is  only  a  means  to  an  end,  the  satisfaction  of  wants. 
With  this  thought  firmly  fixed  in  mind,  it  will  not  be 
difficult  to  understand  that  increase  of  labor,  unless  it 
means  increase  of  human  satisfactions,  is  not  socially 
desirable.  Breaking  window  panes  makes  a  chance  for 
labor,  but  it  does  not  increase  human  satisfactions  as  a 
result  of  that  labor.  On  the  other  hand,  labor-saving  de- 
vices, while  they  may  injure  individual  laborers,  are  bene- 
ficial to  society  as  a  whole,  since  they  enable  it  to  secure 
greater  satisfactions  by  the  same  exertion. 

The  Supply  of  Labor.  —  A  question  of  prime  importance 
in  connection  with  labor  is  that  of  the  conditions  affecting 


130       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

its  supply.  What  is  the  supply  of  labor  ?  Evidently  it 
is  not  mere  numbers,  since  a  hundred  laborers  in  one 
country  often  furnish  much  more  labor  to  production 
than  do  a  hundred  laborers  in  another.  Analysis  of  the 
subject  shows  that  the  two  main  elements  determining 
supply  are  (I)  efficiency  and  (II)  quantity.  The  efficiency 
of  labor  depends  in  turn  first  of  all  upon  (1)  the  effi- 
ciency of  the  laborers  themselves  —  upon  their  charac- 
teristics, mental,  physical,  and  moral.  Temperance, 
trustworthiness,  skill,  alertness,  quick  perception,  com- 
prehensive mental  grasp ;  —  all  these  good  qualities  minis- 
ter to  the  efficiency  of  laborers,  and  hence  of  labor.  In  the 
formation  of  these  qualities  the  physical  and  social  envi1- 
ronment  in  which  the  laborers  are  reared  and  do  their 
work  are  of  the  greatest  importance. 

(2)  The  second  influence  conditioning  the  efficiency  of 
labor  is  the  manner  in  which  it  is  organized  and  directed. 
As  we  are  to  discuss  this  separately  and  at  some  length, 
we  need  note  here  only  that  when  labor  is  carefully  organ- 
ized and  directed,  so  that  each  laborer  can  do  continuously 
the  work  for  which  he  is  best  fitted,  the  labor  by  that 
means  becomes  indefinitely  more  efficient. 

(II)  The  second  element  in  the  supply  of  labor  is  its 
amount  or  quantity.  This  again  depends  partly  (1)  upon 
the  aggregate  number  of  hours  during  which  laborers  work, 
varying  with  the  length  of  the  working  day,  the  number 
of  holidays  in  the  year,  etc.  A  ten-hour  working  day 
means  a  greater  quantity  of  labor  than  an  eight-hour 
day,  and  therefore  a  greater  supply  of  labor,  provided 
the  efficiency  is  not  proportionately  impaired  by  the  long 
hours  of  work. 

The  Growth  of  Population.  —  The  supply  of  labor  un- 


THE  FACTORS  OF  PRODUCTION  131 

doubtedly  increases,  other  things  being  equal,  (2)  with 
the  growth  of  population,  which  means  a  possible  increase 
in  the  number  of  laborers.  Now,  to  the  growth  of  popu- 
lation there  is  no  absolute  limit  save  in  the  means  of 
subsistence  which  can  be  secured.  Thoughout  recorded 
history  we  again  and  again  find  the  population  of  one 
country  and  another  increasing  to  the  starvation  point ; 
i.e.,  increasing  until  the  means  of  subsistence  were  less 
than  sufficient  for  all  who  had  been  born.  From  this  fact 
has  arisen  a  fear  lest  this  over-population  shall  always 
repeat  itself  in  the  future  as  it  has  in  the  past.  Those 
who  are  much  moved  by  such  a  fear  have  often  on  their 
lips  the  theory  of  an  English  economist,  Malthus,  called 
from  his  name,  Malthusianism.  According  to  this  theory, 
population,  when  not  checked,  tends  to  increase  in  geo- 
metrical progression,  while  the  best  that  we  can  hope  for 
in  the  case  of  food  is  that  it  may  increase  in  arithmetical 
progression.  Consequently,  if  there  were  no  other  checks 
upon  the  increase  of  population,  men  would  soon  reach 
the  point  of  starvation.  It  is  admitted  by  the  theory  that 
such  checks  exist.  These  are  of  two  kinds,  positive  and 
preventive.  Positive  checks  are  those  which  act  through 
the  death  of  the  living  —  checks  which  increase  the  death- 
rate,  such  as  plagues,  pestilence,  intemperance,  infanticide, 
cannibalism,  and  war.  Preventive  checks  are  those  which 
act  through  a  lowering  of  the  birth-rate.  These  are  in 
the  main  checks  of  a  moral  character,  including  what 
Malthus  called  prudential  restraint,  —  consisting  in  the 
postponement  or  avoidance  of  marriage,  or  of  the  up- 
bringing of  a  family.  Conscientious  men  will  be  slow  to 
marry  unless  they  can  support  a  wife  and  rear  their  chil- 
dren worthily.  As  population  becomes  denser,  such  men 


132        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

find  the  burden  of  rearing  a  family  heavier,  and  therefore 
postpone  marriage  or  avoid  it  altogether.  With  every 
increase  of  the  average  age  at  marriage,  the  number  of 
children  born  decreases  more  than  in  the  same  proportion. 
Innumerable  customs  exist  all  over  the  world  which  have 
grown  up  from  the  social  need  of  checking  marriage  and 
population,  as,  for  instance,  the  custom  which  obtains  in 
some  peasant  communities  of  marrying  only  when  a  cot- 
tage becomes  vacant  by  the  death  of  its  former  occupant. 
Malthus  himself  formally  deduced  only  this  lesson  :  let 
no  man  marry  until  he  has  a  reasonable  prospect  that  he 
will  be  able  to  support  a  family  of  the  average  size.  He 
wished  to  intensify  in  Englishmen  the  feeling  of  parental 
responsibility.  But  Malthus  himself  often  forgot  the 
hope  contained  in  man's  gradual  enlightenment,  and  took 
a  gloomy  view  of  the  future.  Others,  following  Malthus 
in  his  gloomy  reasoning,  have  thought  that  there  is  no 
escape  for  the  race  from  repeated  over-population  with 
all  its  resulting  vice  and  misery.  Modern  civilization, 
however,  gives  much  cause  for  hope  that  as  prosperity 
becomes  diffused  among  the  people,  the  problem  of  over- 
population may  lose  its  serious  aspect.  Statistics  show 
conclusively  that  everywhere  advancing  civilization  has 
been  accompanied  by  a  decline  in  the  birth-rate.  At  the 
present  time,  nothing  more  in  the  way  of  restraint  upon 
population  seems  necessary  in  the  United  States  than  to 
keep  from  our  shores  the  lowest  classes  of  foreigners  and 
to  exercise  in  contracting  marriage  that  prudence  which 
has  long  characterized  the  really  best  classes  of  American 
society. 

Population  and  the  Standard  of  Living.  —  In  another 
place  we  shall  study  at  some  length  the  influence  exerted 


THE  FACTORS  OF  PRODUCTION  133 

upon  population  by  the  standard  of  living,  —  the  amount 
of  necessaries,  comforts,  and  conveniences  which  people 
are  accustomed  to  enjoy.  Here  we  may  just  pause  to 
note  that  where  the  standard  of  living  is  a  high  one  and 
is  firmly  maintained,  anything  that  threatens  it  will  set 
in  operation  the  preventive  checks  to  which  we  have 
referred.  But  the  standard  of  living  is  not  absolutely 
fixed,  and  changes  in  population  through  the  action  of 
preventive  checks  come  about  only  slowly.  It  may  there- 
fore happen  that  when  the  standard  is  assailed  by  con- 
tinued national  adversity,  the  rising  generation  may  be 
brought  up  to  accept  a  lower  standard,  according  to  which 
a  greater  increase  of  population  will  be  possible  and 
natural. 

The  Two  Sources  of  Increased  Population. —  The  popu- 
lation of  any  country,  as  distinguished  from  the  whole 
world,  has  two  sources  of  growth,  —  natural  increase  and 
immigration.  Natural  increase  comes  about  in  any  country 
through  a  continued  excess  of  births  over  deaths ;  in  other 
words,  through  having  a  birth-rate  which  on  the  average 
exceeds  the  death-rate.  Such  an  excess,  however,  may 
result  from  any  one  of  several  widely  differing  conditions. 
Thus  some  countries,  e.g.,  Russia,  have  a  very  high  death- 
rate  with  a  still  higher  birth-rate,  while  in  other  countries, 
e.g.,  England,  the  increase  results  from  an  excess  of  a  low 
birth-rate  over  a  still  lower  death-rate.  It  is  evident  that 
the  proportion  of  persons  capable  of  labor,  i.e.,  the  sup- 
ply of  labor,  will  be  greater  where  the  death-rate  is  low. 
Manifestly,  too,  it  makes  a  great  difference  in  the  real  hap- 
piness of  a  country  whether  the  increase  in  population  is 
due  to  the  one  condition  or  the  other.  In  our  own  coun- 
try population  has  increased  with  wonderful  rapidity  for 


134       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

over  a  century  both  through  immigration  and  natural 
growth.  Immigration  on  a  vast  scale  has  continued  down 
to  the  present  day,  when  it  is  greater  than  ever  before ; 
and  though  the  birth-rate  has  been  gradually  falling,  the 
death-rate  has  fallen  almost  as  steadily,  with  the  result 
that  natural  increase  of  the  population  has  been  uninter- 
rupted. 

CAPITAL 

Definition.  —  The  third  factor  in  production,  the  sec- 
ondary or  derived  one,  is  capital.  Much  as  hydrogen  and 
oxygen  produce  water,  land  and  labor  produce  capital. 
Itself  neither  land  nor  labor,  capital  is  derived  from  the 
two,  and  is  a  new  thing  with  properties  of  its  own.  In 
everyday  speech  the  word  "  capital "  is  often  used  loosely 
to  describe  things  which  are  technically  not  capital  at  all. 
Thus  the  word  is  often  used  to  include  land,  because,  in 
many  respects,  to  the  man  engaged  in  a  business  enter- 
prise there  is  little  difference  between  his  land  and  his 
machinery.  Yet  technically  the  two  should  be  sharply 
distinguished.  Again,  business  ability  is  often  described 
as  personal  capital,  and  there  is  a  certain  sense  in  which 
this  figurative  expression  has  a  value  ;  but  it  should  al- 
ways be  remembered  that  such  language  is  only  figurative. 
Land  is  nature  ;  capital  is  a  human  product.  Labor  is  in- 
dissolubly  connected  with  the  personality  of  the  laborer  ; 
capital  is  a  material  thing  resulting  from  that  labor. 
Capital  as  a  factor  of  production,  then,  may  be  defined  as 
consisting  of  those  intermediate  products  which  are  used  for 
the  purpose  of  further  production. 

The  Function  of  Capital.  —  Capital  is  "the  medium 
through  which  the  two  original  productive  powers  exert 


THE  FACTORS  OF  PRODUCTION  135 

their  instrumentality."  It  includes  not  only  all  the  man- 
made  aids  to  production,  such  as  buildings,  machinery, 
and  tools,  but  also  all  those  unfinished  goods,  such  as  hides 
and  bar  iron,  which  enter  into  further  production.  These 
partly  manufactured  materials  are  technically  spoken  of 
as  in  the  "process  of  ripening."  They  are  to  be  distin- 
guished from  goods  which  have  passed  through  the  final 
stage  of  production,  and  are  in  the  hands  of  consumers. 
Such  goods  are  no  longer  capital,  although  from  their  wise 
use  new  capital  may  result. 

The  function  of  capital  may  be  expressed  as  follows: 
It  enables  men  to  utilize  more  completely  nature's  materials 
and  forces  by  the  substitution  of  roundabout  methods  of  pro- 
duction for  direct  ones ;  and  it  accomplishes  this  result  by 
furnishing  the  tools  for  such  roundabout  methods,  and  by 
making  possible  a  longer  interval  between  the  initial  effort 
and  the  final  effect,  or  consumption.  Roundabout  methods 
are  almost  without  exception  more  efficient  than  direct 
ones,  but  these  methods  require  tools  or  machinery  and  a 
lengthened  period  of  production.  Thus,  a  man  may  lift  a 
heavier  weight  by  the  roundabout  method  of  using  a  lever, 
instead  of  relying  upon  his  unaided  strength,  since  in  this 
way  he  summons  nature's  forces  to  his  aid.  And  every 
improvement  in  machinery  means  a  more  roundabout 
method  of  applying  labor.  Capitalistic  production,  there- 
fore, as  it  develops,  shows  a  continual  increase  in  the 
number  of  steps  between  the  initial  movement  and  the  final 
product,  and,  as  a  general  rule,  an  increase  in  the  length 
of  the  interval.1 

1  The  teacher  must  remember  that  it  is  impossible  in  an  elementary 
treatise  to  enter  into  detailed  explanations  and  qualifications  of  every 
statement  and  principle.  The  authors  leave  large  latitude  to  him  in  this 


136       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

The  Origin  of  Capital.  —  It  is  often  said  that  capital  is 
the  result  of  saving,  but  such  a  statement  of  the  case  is  at 
least  misleading.  Saving,  as  such,  is  a  merely  negative 
act  and  cannot  produce  a  positive  result.  In  order  that 
we  may  save,  we  must  first  have  something  to  save,  —  that 
is,  we  must  produce,  —  and,  moreover,  we  must  produce 
something  more  than  is  sufficient  for  existence  ;  in  other 
words,  we  must  have  a  surplus.  If  such  a  produced  sur- 
plus is  laid  by  or  saved,  it  may  become  capital. 

Methods  of  Capital  Formation.  —  Such  savings  do  become 
capital  when  they  are  devoted,  directly  or  indirectly,  to 
furthering  production.  One  of  the  simplest  ways  in 
which  saved  surplus  may  be  transformed  into  capital 
would  be  illustrated  by  the  case  of  a  fisherman  who  should 
use  part  of  the  catch  of  one  period  to  subsist  him  while  in 
a  later  period  he  worked  at  a  canoe,  or  net,  or  other  device 
for  increasing  the  product  of  his  future  labor.  In  advanced 
communities  the  process  is  usually  much  more  complex. 
The  farmer,  for  instance,  who  wishes  a  self-binder,  pays 
for  it  directly  with  money.  But  the  money  has  been 
received  in  return  for  a  saved  surplus  of  his  farm  products. 
Meanwhile,  those  who  have  been  working  on  the  manifold 
processes  which  result  in  the  finished  farm  machine,  have 
been  subsisted  out  of  a  surplus  which  has  been  advanced 
to  them.  The  case  is  the  same  with  the  manufacturer. 


direction.  Improvements  sometimes  seem  to  shorten  processes, 
we  go  far  enough  back  in  our  studies,  we  shall  find  that  the  rule  given 
above  is  correct  as  a  general  principle  and  calls  attention  to  one  of  the 
most  remarkable  and  significant  principles  of  capitalistic  production.  A 
threshing  machine  threshes  grain  rapidly,  but  to  apply  the  above  principle 
aright,  we  have  to  think  of  all  the  steps  involved  in  the  production  of  the 
machine  and  the  length  of  the  process.  The  roundabout  methods,  of 
course,  are  not  an  end  but  a  means  to  an  end. 


THE  FACTOBS  OF  PRODUCTION  137 

He  may  sell  his  products  and  consume  at  once  the  result- 
ing means,  or  he  may  consume  less  than  all,  and  with  his 
remaining  means  may  purchase  from  others  the  forms  of 
capital  of  which  he  stands  in  need.  Or,  having  all  the 
machinery  needed,  he  may  invest  his  surplus  in  the  stock 
of  some  company,  in  which  case  the  company  will  use  it 
for  the  purchase  of  needed  capital.  In  all  of  these  cases  the 
use  of  money  obscures  the  nature  of  the  transaction,  which 
is  at  bottom  only  the  turning  of  labor  from  the  production 
of  finished  consumption  goods  to  the  production  of  capital 
goods. 

Results  of  the  Use  of  Capital.  —  It  remains  for  us  to  say 
a  few  words  regarding  the  results  of  the  use  of  capital. 
First  of  all,  (1)  capital  makes  possible  an  increased  amount 
of  product.  Things  that  could  be  produced  by  hand  and 
without  capital  can  be  produced  in  much  greater  quantities 
when  capital  is  present.  In  the  second  place,  (2)  capital 
makes  possible  certain  utilities  which  we  could  not  enjoy 
at  all  without  it.  Thus,  the  enjoyment  of  oysters  and 
shell-fish  at  great  distances  from  the  coast  would  be 
impossible  without  the  capital  engaged  in  transportation. 
Finally,  (3)  capital  makes  possible  in  many  cases  a  higher 
quality  of  product  than  could  exist  in  its  absence. 

Representative  Goods.  —  One  class  of  goods,  if  they  may 
be  so  called,  must  be  especially  distinguished  from  capital 
in  the  technical  sense  of  the  word.  We  refer  to  what  are 
known  as  "  representative  "  goods,  which  are/  not,  strictly 
speaking,  goods  at  all,  but  only  signs  of  the  ownership  of 
goods.  Notes,  mortgages,  bonds,  and  stock  certificates 
are  not  goods  ;  they  simply  represent  ownership.  Neither 
are  franchises  a  part  of  social  capital.  When  a  city  grants 
to  a  company  a  franchise  for  the  construction  and  opera- 


138        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

tion  of  a  street  railway,  it  does  not  thereby  directly  create 
new  capital.  It  merely  grants  permission  to  the  company 
to  make  use  of  existing  social  capital  or  to  create  social 

capital. 

Fixed  and  Circulating  Capital.— It  has  been  common 
among  economists  to  classify  capital  as  fixed  and  circu- 
lating. Circulating  capital  is  that  which  can  be  used  but 
once,  or  in  one  round  of  operations.  Its  entire  value  passes 
over  into  the  value  of  the  finished  product.  Fixed  capi- 
tal, on  the  other  hand,  is  capital  which  lasts  through  a 
succession  of  operations,  only  a  part  of  its  value  passing 
over  into  the  product  with  each  use.  Thus,  the  raw  mate- 
rials and  the  partly  finished  goods  used  in  manufacturing 
are  examples  of  circulating  capital,  while  the  factory  build- 
ing and  the  machinery  are  fixed  capital. 

Free  and  Specialized  Capital.  —  A  somewhat  similar 
classification  is  that  oifree  and  specialized  capital.  Even 
more  than  is  commonly  the  case  with  such  classifications, 
these  words  must  be  understood  as  pointing  only  to  rela- 
tive ideas.  Specialized  capital  is  that  which  by  its  form 
or  circumstances  can  be  used  for  only  one  productive  pro- 
cess, or  at  most  for  a  very  limited  number  of  such  processes. 
Free  capital,  on  the  other  hand,  is  capital  which  can  le 
applied  to  any  one  of  a  considerable  number  of  productive 
operations.  Thus  coal,  iron,  and  leather  are  relatively 
free  forms  of  capital,  while  railways,  canals,  and  many 
forms  of  machinery  are  relatively  specialized.  The  prac- 
tical importance  of  the  difference  lies  in  the  fact  that  free 
forms  of  capital  can  more  readily  adjust  themselves  to 
changes  in  the  social  demand  for  goods.  Thus,  if  too 
great  an  amount  of  a  nation's  capital  is  converted  into 
fixed  and  specialized  forms,  —  into  railways,  for  example, 


THE  FACTORS   OF  PRODUCTION  139 

—  the  mistake  is  not  easily  or  quickly  corrected,  and  the 
entire  production  of  the  country  must  suffer  in  conse- 
quence of  the  bad  adjustment.  Such  disproportionate 
investment  of  capital  in  fixed  and  specialized  forms  is 
believed  by  many  economists  to  be  the  most  important 
single  cause  of  industrial  crises. 

SUMMARY 

1.  Of  the  three  factors  of  production,  land  and  labor  are  primary 

and  original,  while  capital  is  secondary  and  derived. 

2.  Land  furnishes  "  standing  room,"  fertility,  and  natural  treasures. 

3.  Labor  means  human  exertion  of  mind  or  body  undergone  with  the 

object  of  creating  utilities. 

4.  The  efficiency  of  labor  depends  upon  the  efficiency  of  the  individ- 

ual laborers,  and  upon  the  efficiency  of  their  organization. 

5.  Capital  consists  of  intermediate  products  used  for  further  produc- 

tion. 

6.  The  formation  of  capital  involves  saving  or  "  abstinence." 

QUESTIONS 

1.  Mention  some  of  the  checks  upon   population.     How  does  the 

standard  of  life  affect  the  increase  of  population  ? 

2.  Why  should  land  be  distinguished  from  capital?    To  which  class 

do  the  buildings  upon  land  belong  ?    The  fertilizer  that  was  used 
five  years  ago  ? 

3.  What  advantages  flow  from  roundabout  processes  of  production  ? 

Mention  some  of  the  steps  in  the  development  of  indirect  pro- 
cesses in  the  production  of  wheat. 

4.  Distinguish  between  free  and  specialized  capital;   between  fixed 

and  circulating  capital.    What  are  representative  goods  ? 

LITERATURE 

Bohm-Bawerk,  E.  von:   Positive    Theory  of  Capital,  Bk.   I,  Ch.  II, 

pp.  17-23. 
Clark,  J.  B. :  The  Distribution  of  Wealth,  Ch.  IX,  pp.  116-123. 


140        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Commons,  J.  R. :  The  Distribution  of  Wealth,  Ch.  III.  One  of  the 
best  discussions  of  the  law  of  increasing  and  diminishing 
returns. 

Marshall,  A.:  Principles  of  Economics,  Bk.  IV,  Ch.  I,  §  1. 

Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  I,  Ch.  I,  §§  1-4. 

Smart,  W. :  Introduction  to  the  Theory  of  Value. 


CHAPTER  III 
THE  ORGANIZATION  OF  PRODUCTION 

IN  the  preceding  chapter  we  have  considered  the  factors 
of  production  separately,  studying  the  nature  of  each, 
and  the  principles  governing  its  efficiency  and  increase. 
We  have  now  to  study  the  manifold  ways  in  which  pro- 
duction in  our  day  has  come  to  be  socialized  and  organ- 
ized. It  is  as  though  we  had  studied  the  nature  of  the 
various  parts  of  a  machine,  and  were  then  to  study  further 
the  different  ways  and  methods  of  putting  the  parts  to- 
gether, and  to  learn  how  these  acted  as  a  unit  when  the 
whole  machine  was  "set  up." 

I.   ORGANIZATION  OP  THE  FACTORS  REGARDED 
COLLECTIVELY 

Early  Simplicity.  —  We  have  already  seen  that  the 
three  main  parts  of  the  great  machine  of  production  are 
land,  labor,  and  capital ;  and  we  may  therefore  first  of  all 
inquire  how  these  parts  are  "  assembled "  for  efficient 
work.  In  other  words,  the  first  problem  in  our  present 
study  is  that  of  the  cooperation  or  organization  of  the 
factors  of  production  taken  together  or  collectively.  This 
organization,  in  the  early  stages  of  social  development,  was 
exceedingly  simple.  The  old  household  economy  was  so 
organized  that  it  is  scarcely  possible  to  distinguish  in  it  the 
three  separate  factors.  The  same  man  owned  the  land,  the 

141 


142       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

labor,  and  the  capital,  and  as  sole  judge  of  what  was  right 
distributed  the  total  product  among  those  who  aided  in 
production.  When,  with  advancing  civilization,  produc- 
tion came  to  be  carried  on  by  village  communities,  there 
was  collective  ownership  of  the  instruments  of  production 
and  management  by  a  common  authority,  and  the  distri- 
bution of  the  product  was  regulated  by  custom.  Later, 
under  the  gild  organization  of  industry  and  commerce, 
there  was  a  similar  lack  of  sharp  separation  of  the  factors. 
The  gild  of  the  Middle  Ages  embraced  apprentice,  jour- 
neyman, and  master,  and  regulated  industry  and  commerce 
under  governmental  supervision.  The  master  directed 
the  business,  owned  the  capital,  and  worked  with  his  own 
hands.  He  received  the  entire  product  of  the  business 
after  supporting  the  apprentice  and  paying  the  journey- 
man. Labor  was  in  a  certain  degree  set  off  from  the  other 
factors,  but  the  separation  was  by  no  means  complete. 
The  man  who  at  any  time  supplied  labor  looked  forward 
not  without  reason  to  the  time  when  he  himself  in  turn 
should  become  capitalist,  employer,  and  manager,  for  such 
advance  was  a  regular  part  of  the  gild  system. 

Growth  of  Complexity.  —  As  has  been  explained  in  ear- 
lier chapters,  the  last  one  hundred  and  fifty  years  have 
witnessed  a  great  change  in  the  organization  of  the  pro- 
ductive factors.  Here  and  there  still  survive  traces  of  the 
earlier  simplicity,  and  one  great  branch  of  production, 
agriculture,  is  still  generally  carried  on  in  our  country 
without  a  separation  of  the  factors.  A  large  proportion 
of  our  small  farmers  own  the  land  they  cultivate  and  the 
capital  they  employ,  and  depend  wholly  or  in  great  part 
upon  their  own  labor  and  that  of  their  families  for  their 
product.  But  in  commerce,  manufacturing,  and  transpor- 


THE  ORGANIZATION  OF  PRODUCTION  143 

tation,  we  have  as  a  rule  to-day  one  large  class  furnishing 
labor  only,  another  class  furnishing  capital  and  sometimes 
land,  and  a  third  class  organizing  and  managing  business. 
A  modern  railway  corporation  serves  as  a  good  illustration 
of  this.  The  holders  of  the  bonds  —  and  in  some  cases 
the  stocks  —  furnish  the  capital,  and  receive  in  return 
interest  or,  in  the  case  of  the  stocks,  dividends.  Labor, 
supplied  by  others,  is  paid  for  by  wages  and  salaries. 
The  land  is  also  regularly  supplied  by  the  bondholders, 
being  acquired  by  the  exchange  of  a  part  of  their  capital. 
Consequently,  we  have  rent  also,  though  this  does  not 
usually  appear  as  a  separate  item  in  railway  bookkeeping, 
except  in  those  cases  where  the  land  has  been  leased  in- 
stead of  being  purchased  outright.  Finally,  the  managers 
and  directors  of  the  business,  chosen  by  the  stockholders 
from  their  own  number  or  from  without,  constitute  a 
separate  class  in  the  organization. 

The  Entrepreneur.  —  It  is  easy  to  see  that  when  business 
organization  has  grown  so  complex,  some  central  guiding 
intelligence  is  necessary,  which  shall  overlook  the  whole 
field,  and,  after  deciding  what  things  shall  be  produced, 
and  in  what  quantities,  shall  provide  that  the  necessary 
factors  of  production  work  together  in  creating  the  prod- 
uct. The  man  who  does  this  usually  assumes  the  risk  of 
loss  or  failure,  and,  on  the  other  hand,  pays  a  stipulated 
sum  to  those  persons  or  classes  who  supply  him  with  the 
factors  of  production. 

In  the  England  of  the  eighteenth  century  such  a  man 
was  called  an  "undertaker"  or  "adventurer."  As  the  word 
"  undertaker  "  has  since  come  to  be  applied  to  one  small  and 
special  class  of  business  men,  and  as  the  word  "  adventurer  " 
now  carries  with  it  an  idea  of  rashness  or  even  dishonesty, 


144        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

the  French  word  "  entrepreneur,"  an  exact  equivalent  of 
the  word  "  undertaker,"  is  now  regularly  used  instead. 

The  function  of-  the  entrepreneur  has  become  of  the 
utmost  importance  in  modern  society,  and  seems  to  be 
growing  in  importance  with  every  increase  in  the  com- 
plexity of  industrial  organization.  He  has  been  well 
called  the  "  Captain  of  Industry,"  since  it  is  he  who  mar- 
shals and  commands  the  industrial  forces,  and  more  than 
any  one  else  bears  the  responsibility  for  failure  or  success. 
Business  enterprises  under  able  leaders  achieve  brilliant 
successes  only  to  languish  and  become  bankrupt  when 
death  removes  the  guiding  hand  and  brain.  Such  was 
the  case  with  the  great  mercantile  business  which  was 
built  up  in  New  York  City  by  A.  T.  Stewart.  Whole 
towns  in  many  cases  depend  for  their  prosperity  upon  a 
few  shrewd  Captains  of  Industry. 

The  Forms  of  Business  Undertaking.  —  The  entrepre- 
neurship  of  a  business  is  not  always  undertaken  by  a  single 
individual.  On  the  contrary,  a  rapidly  increasing  vol- 
ume of  business  is  coming  to  be  carried  on  in  forms  which 
call  for  a  division  of  the  function  or  functions  of  the  en- 
trepreneur among  many  individuals.  The  following  are 
among  the  main  forms  of  business  undertaking  in  the 
modern  world:  — 

1.  The  Single  Entrepreneur  System. — In  this  form  of 
business,  a  single  individual  owns  or  hires  the  capital  and 
land,  employs  the  labor,  directs  the  business,  and  bears 
the  whole  risk. 

2.  Partnership.  —  In   the   case   of   a   partnership,   the 
ownership,  direction,  and  responsibility  are  shared,  some- 
times in  unequal  proportions,  by  the  two  or  more  partners, 
who  are  severally  liable  at  law  to  the  full  extent  of  their 
fortunes. 


THE  ORGANIZATION  OF  PRODUCTION  145 

3.  Business  Corporations.  —  This  form  differs  from  the 
foregoing  chiefly  in  the  fact  that  the  individual  responsi- 
bility of  the  members  of  the  corporation  is  limited  by  the 
charter  or  by  the  statutes  governing  such  companies,  and 
in  the  further  fact  that  there  is  no  necessary  legal  limit 
to  the  life  of  such  corporations.     On  account  of  the  mag- 
nitude of   business  transacted   under  this  form,  it  often 
happens  that  the  functions   of   entrepreneurship  are  di- 
vided, the  shareholders  owning,  controlling,  and  bearing 
the  risk,  but  committing  the  active  management  to  elected 
directors,  and,  through  the  directors,  to  hired  superinten- 
dents and  managers. 

4.  Cooperative  Businesses. — In  what  is  technically  known 
as  cooperative  production,  the  workmen  combine,  in  the 
form  of  a  partnership  or  corporation,  in  the  ownership  or 
control  of  the  other  factors  of  production,  share  all  risks, 
and  secure  direction  of  the  business  either  through  their 
own  members,  chosen  for  the  task,  or  through  regular 
salaried  managers.     The  great  weakness  of  the  system 
has  thus  far  been  that  the  cooperating  workmen  have  too 
frequently    underestimated    the   importance    of    efficient 
direction. 

5.  Government  Enterprise. — The    Federal,   state,  and 
local  governments  severally  own  and  manage  many  busi- 
nesses of  great  importance.     In  these  instances  the  people 
as  a  whole  own  the  business  and  bear  all  risks,  while  they 
commit  the  direction  to  elected  or  appointed  managers. 

II.   THE  ORGANIZATION  OF  THE  FACTOR  LABOR 

In  studying  the  forms  of  business  undertaking,  we  have 
really  been  studying  the  different  ways  in  which  society 
secures  cooperation  and  organization  of  the  factors  of  pro- 


146        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

duction  as  a  whole.  We  have  now  to  study  the  ways  in 
which  the  factors,  considered  separately,  are  organized  for 
increased  efficiency.  And  first  as  to  labor. 

If  it  were  possible  to  conceive  of  a  people  among  whom 
every  individual  produced  for  himself  all  that  he  used, 
exchanging  products  with  no  one,  we  should  have  an 
example  of  isolated  or  unorganized  labor  and  unorganized 
production.  But  there  is  no  evidence  that  such  an  ex- 
treme state  of  things  ever  obtained  anywhere.  Wherever 
we  find  men  gathered  together,  we  find  some  socialization, 
some  organization  of  their  efforts  to  secure  a  living,  some 
organization  of  labor. 

Forms  of  Organization.  —  1.  Simple  Associated  Effort. 
One  of  the  earliest  forms  of  organization  to  be  developed 
among  men,  and  one  that  still  plays  a  considerable  part 
in  the  economy  of  the  world,  is  that  which  has  been  named 
simple  associated  effort.  When  a  group  of  men  unite  their 
efforts  in  raising  a  heavy  weight,  or  two  men  beat  together 
a  heated  iron  or  work  a  saw,  we  have  illustrated  this  sim- 
ple form  of  organization.  Sometimes,  as  in  the  first  of 
these  cases,  the  combination  is  to  effect  a  result  which 
could  not  be  accomplished  at  all  by  the  single  individual. 
Always  the  combination  results  in  a  greater  accomplish- 
ment than  would  flow  from  the  sum  of  the  efforts  of  the 
several  individuals. 

2.  Division  of  Occupations.  —  With  advancing  civiliza- 
tion, industry  as  a  whole  has  been  more  and  more  broken 
up  into  parts,  and  the  parts  have,  therefore,  constantly 
been  growing  smaller.  One  of  the  earliest  steps  in  the 
organization  of  labor,  perhaps  even  earlier  than  that  which 
we  have  described  above,  was  taken  when  the  members  of 
primitive  society  began  to  specialize  in  their  work.  And 


THE  ORGANIZATION  OF  PRODUCTION  147 

the  whole  story  of  society  since,  not  only  in  its  economic 
phase,  but  in  all  its  other  phases  as  well,  has  been  one  of 
increasing  specialization  of  work  or  function.  With  divi- 
sion and  subdivision  constantly  taking  place,  it  is  clearly 
impossible  to  recognize  or  name  all  of  the  stages  of  prog- 
ress. But  two  of  these  stages  are  recognized  in  popular 
speech  as  of  distinct  character.  The  first  of  these  is  what 
we  may  call  division  of  occupations.  Probably  the  most 
primitive  form  of  such  division  was  that  by  which  among 
savages  the  men  took  upon  themselves  the  functions  of 
warriors  and  hunters,  putting  upon  the  women  the  tasks 
of  the  household  and  the  field.  Division  of  occupations  is 
indicated  by  the  names  of  the  manifold  trades  or  callings. 

3.  Division  of  Labor.  —  The  further  subdivision  of  ex- 
isting occupations  has  been  the  work  of  the  last  few  cen- 
turies, and  especially  of  the  eighteenth  and  nineteenth. 
To  this  further  subdivision  —  this  further  organization 
—  of  labor  has  been  given  the  technical  name  division  of 
labor,  although,  as  we  have  seen,  division  of  occupations  is 
but  an  earlier  division  of  labor  on  larger  lines.  This  form 
of  organization  is  of  such  prime  importance  in  modern  in- 
dustry that  it  calls  for  detailed  and  careful  study. 

In  our  discussion  of  labor  as  a  factor  of  production,  it 
was  pointed  out  that  the  efficiency  of  labor  is  in  great 
measure  conditioned  by  the  efficiency  of  its  organization. 
Such  efficiency  of  organization  is  secured  in  the  highest 
degree  through  division  of  labor.  Division  of  labor  — 
as  well  as  division  of  occupations  —  might  perhaps  with 
equal  propriety  be  called  cooperation  of  labor.  Produc- 
tive processes,  especially  in  manufacturing,  are  to-day 
divided  into  minute  parts,  one  part  or  perhaps  two  or 
three  very  small  parts  being  given  to  each  laborer,  or  to 


148        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

each  group  of  laborers.  Thus,  in  a  modern  watch  factory, 
one  workman  makes  one  small  part  of  a  watch,  another 
a  second,  and  so  on.  So  many  are  the  divisions  of  the 
process  of  watchmaking  that  no  fewer  than  300  workmen 
are  required  to  organize  efficiently  such  an  establishment. 
In  the  same  way,  instead  of  one  man  performing  all  the 
operations  in  the  making  of  a  boot,  as  was  once  the  rule, 
we  have  to-day  a  front  cutter,  back  cutter,  back-stay  cut- 
ter, top  cutter,  facing  cutter,  lining  cutter,  sorter  and 
buncher,  size  and  case  marker,  stay  skiver,  top  skiver, 
crimper,  front  trimmer,  top-front  stitcher,  top-back 
stitcher,  and  so  on  to  as  many  as  113.  But  while  the 
workmen  divide  the  processes  among  themselves,  they 
unite  in  producing  the  completed  article,  and  hence  we 
may  say  that  division  of  labor  implies  cooperation  of 
labor.  When  we  use  the  phrase  "division  of  labor,"  we 
are  looking  at  one  side  of  the  process ;  while,  when  we 
speak  of  cooperation  of  labor,  we  are  viewing  it  from 
another  side.  And  the  same  is  true  of  division  of  occu- 
pations. 

Division  of  Labor  Illustrated.  —  A  good  illustration  of  di- 
vision of  labor  is  afforded  by  the  needle-making  industry  as  it 
is  generally  conducted  to-day.  Steel  wire,  which  is  itself  the 
product  of  highly  divided  labor,  is  the  raw  material  of  the 
needle  factory.  All  needles  pass  through  the  same  general  list 
of  processes.  These,  as  the  visitor  to  the  factory  may  view 
them,  are  in  outline  as  follows :  The  wire  is  first  put  through 
a  machine  called  the  straightener  and  cutter,  which  removes  all 
bends  in  the  wire  and  cuts  it  into  pieces  about  one-third  the 
length  of  the  finished  needle.  These  short  pieces,  called  blanks, 
are  placed  in  small  iron  cylinders,  which  are  rotated  in  such  a 
manner  as  to  keep  the  wire  in  constant  motion  under  friction. 
They  are  thus  freed  from  scale  and  dirt,  and  are  ready  for 


THE  ORGANIZATION  OF  PRODUCTION  149 

"cold  swaging."  For  cold  swaging,  the  blanks  are  put  into  a 
hopper,  from  which  they  are  taken  by  machinery,  one  at  a  time, 
and  held  so  that  one  end  is  presented  to  the  action  of  a  set  of 
revolving  sectional  steel  dies.  By  the  constant  opening  and 
shutting  of  these  rotating  dies,  the  end  is  compressed  and  drawn 
out  to  form  the  needle  "  blade."  After  the  swaging  is  finished, 
another  bit  of  machinery  is  made  to  stamp  upon  the  flattened 
surface  of  the  needle  a  number  or  mark,  which  indicates  what 
sort  of  needle  it  is  finally  to  be.  Inequalities  are  next  reme- 
died by  rimming  all  blanks  to  a  uniform  length.  When  the 
blanks  have  been  trimmed  and  stamped,  they  are  taken  to  a 
grooving  machine,  by  which  a  short  groove  on  one  side  of  the 
needle  and  a  long  groove  on  the  other  side  are  made  simulta- 
neously. The  needle  is  now  ready  for  its  eye.  Women  are 
usually  employed  in  this  process,  which  calls  for  a  high  degree 
of  manual  dexterity  and  keen  sight  in  controlling  the  blanks 
as  they  are  "fed"  through  the  machine.  One  girl  with  modern 
machinery  can  punch  about  seven  thousand  needle-eyes  a  day, 
or  more  than  a  dozen  a  minute.  The  needles  are  next  given 
their  points  by  machines,  which  differ  according  to  the  kind  of 
point,  as  "  round,"  "  twist,"  "  diamond,"  etc.  So  far  as  shape 
is  concerned  the  needles  are  now  complete ;  but  the  softness  of 
the  steel  up  to  this  point  makes  them  useless  for  practical  pur- 
poses. They  must  therefore  be  hardened  and  tempered,  and 
this  in  turn  requires  several  distinct  processes  and  opportunities 
for  divided  labor.  Next  they  are  sharpened  and  polished  by  a 
piece  of  machinery  which  holds  nearly  a  hundred  of  them  at 
once  against  a  brass  wire  scratch-brush  revolving  8000  times  a 
minute,  and  afterward  against  a  bristle  brush.  The  eyes  of 
the  needles  are  then  smoothed  by  stringing  the  needles  on  a 
cotton  thread,  covered  with  oil  and  emery,  which  is  drawn  back 
and  forth  at  different  angles  to  the  needles  so  that  the  polish- 
ing powder  acts  on  all  parts  of  the  aperture.  Next  follow 
finish  pointing,  done  on  a  fine  emery,  and  finish-polishing,  done 
by  a  revolving  brush  with  crocus  and  alcohol.  Counting  and 
packing  offer  still  further  opportunities  for  divided  labor,  by 
which  the  utmost  economy  of  energy  is  achieved. 


150       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

The  Advantages  of  Division  of  Labor.  —  It  has  been  usual 
for  economists  to  enumerate  the  advantages  of  the  division 
of  labor  as  follows  :  First  of  all,  it  secures  (1)  a  gain  or 
saving  in  time.  This  gain  in  time  is  twofold,  (a)  The 
workman  does  not  have  to  pass  so  frequently  from  one 
operation  to  another,  and  (6)  he  can  learn  his  special  pro- 
cess in  less  time.  In  the  second  place,  division  of  labor 
secures  (2)  a  gain  in  skill.  In  the  third  place,  the  system 
results  in  a  (3)  gain  in  adaptation,  by  finding  a  place  for 
every  one  and  putting  every  one  in  his  place.  The  man  who 
is  physically  or  mentally  strong  can  devote  his  whole  time 
to  work  that  is  worthy  of  him,  while  the  man  who  is  weak 
in  muscle  or  in  mind  can  find  work  in  which  great  powers 
would  in  part  be  wasted.  In  the  fourth  place,  division  of 
labor  secures  (4)  a  gain  by  paving  the  way  for  invention. 
The  processes  being  rendered  simple,  the  individual  work- 
man  can  make  himself  more  familiar  with  them,  and  can 
therefore  see  where  and  how  improvements  can  best  be 
made.  It  has  therefore  happened  that  a  large  proportion 
of  modern  inventions  have  come  from  the  brains  of  the 
workmen.  Finally,  division  of  labor  secures  (5)  a  gain 
through  a  more  complete  utilization  of  capital.  Each  work- 
man using  one  tool  or  one  set  of  tools,  or  operating  one 
machine,  keeps  the  capital  employed  all  the  time. 

Disadvantages  of  Division  of  Labor.  —  But  division  of 
labor  has  also  its  dark  side.  First  of  all,  the  system,  by 
making  possible  and  profitable  the  employment  of  women 
and  children,  (1)  often  deprives  men  of  their  employment. 
In  American  cities,  one  may  sometimes  find  fathers  at 
home  "  keeping  house,"  while  their  wives  and  children  are 
working  long  hours  in  factories.  In  the  second  place, 
division  of  labor  (2)  give s  rise  to  a  dependence  of  man  upon 


THE  ORGANIZATION  OF  PRODUCTION  151 

man  that  is  often,  at  least  in  part,  an  evil.  Thus  a  strike 
by  a  particular  group  of  men  in  one  business  —  mining,  for 
instance  —  may  throw  out  of  employment  not  only  all  the 
other  men  in  that  business,  but  also  thousands  or  tens  of 
thousands  of  other  men  whose  work  depends  upon  the 
product  of  the  industry  in  which  the  strike  occurs.  The 
same  sort  of  hardship  results  from  division  of  labor  when 
workmen  too  old  to  acquire  a  new  trade  are  deprived  of 
their  usual  employment  by  a  change  in  the  conditions  or 
methods  of  production.  These  evils,  to  be  sure,  right 
themselves  in  the  long  run  ;  but,  as  one  writer  has  keenly 
remarked,  the  long  run  is  too  long  for  the  ordinary  man, 
whose  life  is  but  a  short  run.  A  third  evil  connected 
with  the  system  of  divided  labor  is,  that  by  it  (3)  labor 
often  loses  its  attractiveness  and,  at  the  same  time,  its  edu- 
cational value.  A  workman  who  makes  a  whole  watch 
can  acquire  such  love  for  his  work  as  makes  him  an  artist ; 
but  who  can  learn  to  love  the  mere  routine  of  putting 
metal  disks  under  the  face  of  a  die  for  ten  hours  a  day? 
"It  is,"  as  one  writer  has  well  said,  "a  sad  thing  for  a 
man  to  have  to  testify  that  he  has  never  made  more  than 
the  eighteenth  part  of  a  pin." 

III.   THE  ORGANIZATION  OF  THE  FACTOR  CAPITAL 

In  the  foregoing  discussion  of  the  organization  of  labor, 
it  will  perhaps  have  been  noticed  that  the  organization  of 
labor  is  intimately  associated  with  the  organization  of 
capital.  That  division  of  labor  would  never  have  devel- 
oped without  that  organization  of  capital  in  the  form  of 
machinery  which  is  characteristic  of  modern  industry,  is 
well  illustrated  in  the  description  of  divided  labor  in  the 


152        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

needle  industry.  We  need  not  concern  ourselves  further, 
therefore,  with  a  separate  consideration  of  the  organization 
of  capital. 

IV.   THE  ORGANIZATION  OF  THE  FACTOR  LAND 

Territorial  Division  of  Labor. — To  a  certain  extent  the 
same  is  the  case  with  the  organization  of  natural  agents 
as  with  the  organization  of  capital.  Labor  is  human  effort 
applied  to  natural  agents,  usually  aided  by  capital.  Or- 
ganization of  labor,  therefore,  generally  involves  at  the 
same  time  organization  in  the  use  of  natural  agents  and 
capital.  But  there  is  one  form  of  organization  of  produc- 
tion that  is  so  generally  conditioned  by  the  factor,  nature, 
that  we  may  well  treat  it  as  a  form  of  organization  of  the 
natural  agents  themselves.  The  two  names  most  com- 
monly applied  to  this  form  of  organization  are  localization 
of  industries  and  territorial  division  of  labor.  As  with  the 
division  of  labor,  so  with  localization  of  industries,  the 
tendency  is  toward  increasing  specialization  of  function, 
in  the  one  case  among  persons,  in  the  other  among  places. 
Thus  the  territorial  specialization  by  which  country  dis- 
tricts supply  the  towns  with  food,  receiving  manufactured 
goods  in  exchange,  —  society  thus  dividing  its  labor  into 
country  work  and  city  work,  —  is  like  the  primitive  divi- 
sions of  occupations,  among  savages,  into  man's  work  and 
woman's  work.  And  the  finer  territorial  specialization  by 
which  certain  agricultural  regions  produce  almost  exclu- 
sively some  one  product  or  some  few  special  products,  while 
certain  manufacturing  centres  similarly  devote  themselves 
to  making  some  one  commodity  or  some  few  commodities, 
may,  in  the  same  way,  be  likened  to  that  form  of  division 
of  labor  which  we  have  described  at  length. 


THE  ORGANIZATION  OF  PRODUCTION  153 

The  last  United  States  census  contains  many  interesting 
illustrations  of  territorial  division  of  labor  or  localization 
of  industry.  According  to  the  census,  more  than  half  the 
gloves  of  the  country,  measured  by  their  value,  are  made 
in  the  adjoining  towns  of  Gloversville  and  Johnstown,  in 
east  central  New  York.  Moreover,  the  value  of  the  gloves 
manufactured  was  more  than  two-thirds  of  the  total  value 
of  all  manufactured  products  in  the  case  of  Gloversville, 
and  more  than  one-half  in  the  case  of  Johnstown.  Troy, 
New  York,  produces  nearly  three-fourths,  in  value,  of  all 
the  collars  and  cuffs  made  in  the  country,  and  nearly 
seven-tenths  of  all  the  manufacturing  workmen  in  Troy 
are  engaged  in  this  one  industry.  Philadelphia  makes 
over  45  per  cent  of  the  country's  carpets.  Nine-tenths  of 
the  wage-earners  in  South  Omaha,  Nebraska,  are  engaged 
in  slaughtering  and  meat-packing. 

Among  the  causes  which  lead  to  such  localization  of  in- 
dustry, the  following,  mentioned  in  the  census  volume,  are 
probably  most  important :  nearness  to  materials,  nearness 
to  markets,  water-power,  favoring  climate,  local  supply  of 
the  kind  of  labor  needed,  local  supply  of  capital  for  invest- 
ment, the  momentum  given  by  an  early  start.  Inasmuch 
as  most  of  these  causes  have  to  do  with  geographical  con- 
siderations, rather  than  with  labor,  it  will  be  understood 
why  we  have  treated  localization  of  industries  as  a  form 
of  organization  of  natural  agents,  rather  than  as  a  phase  of 
the  organization  of  labor. 

Just  as  advancing  civilization  brings  increased  spe- 
cialization or  division  of  labor,  so  we  may  expect  that 
the  future  will  witness  an  ever  growing  specialization  of 
industry  on  geographical  lines.  Increasing  stability  of 
governments,  improved  methods  of  rapid  transit,  the 


154       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

breakdown  of  interracial  antipathies  and  prejudices,  are 
making  world  markets  possible,  and  with  the  world  mar- 
kets will  come  a  condition  of  affairs  in  which  every  coun- 
try and  every  section  of  every  country  will  confidently 
produce  to  the  utmost  those  goods  in  the  production  of 
which  it  enjoys  the  greatest  relative  advantage. 

V.   CONDITIONS  DETERMINING  THE  ORGANIZATION  OF 
PRODUCTION 

We  have  already  noted  in  passing  one  or  two  of  the  con- 
ditions upon  which  depend  the  efficiency  of  organization 
of  production.  It  may  be  well  to  bring  them  together  at 
this  point  and  to  speak  at  the  same  time  of  an  even  more 
important  factor  which  conditions  all  production,  no  matter 
how  organized. 

1.  Extent  and  Character  of  the  Population.  —  Perhaps 
first  in  logical  importance  is  the  size  and  character  of 
the  population.     The  more  numerous  the  consumers,  the 
greater  must  be  the  supply  of  goods ;  and  the  greater  the 
supply  of  goods,  as  a  general  rule,  the  more  minute  will 
be   the   organization  which   will  be  found  economically 
profitable.     This  idea  is  often  expressed  in  the  statement 
that  division  of  labor  is  conditioned  by  the  extent  of  the 
market. 

2.  0-rowth  of  Capital.  —  The  second  great  condition  of 
the  organization  of   industry  is  the  growth   of   capital, 
whether  in  the   form   of   machinery  or  in  the  form   of 
means  of  transportation  and  communication  and  exchange. 
Improvements  in  machinery  have  made  increased  speciali- 
zation and  organization  technically  possible,  while  rail- 
ways, telegraph  and  cable  lines,  and  banks  have  widened 


THE  ORGANIZATION  OF  PRODUCTION  155 

the  markets  and  have  thus  made  such  organization  eco- 
nomically possible,  that  is,  profitable. 

3.  The  Character  of  the  Industry.  —  Not  all  industries 
lend  themselves  equally  to  some  of  the  kinds  of  organiza- 
tion that  we  have  described,  no  matter  what  the  population 
or  the  extent  of  capitalization.     Agriculture  has  hitherto 
in  the  main  defied  all  attempts  at  minute  division  of  labor. 
Manufacturing  lends  itself  to   division  of  labor  in  the 
highest  degree.     Without  entering  into  a  discussion  of 
all  the  technical  reasons  for  this  difference,  we  may  say 
that  the  main  requirement,  within  the  industry  itself,  for 
minute  organization  is  that  the  different  processes  shall 
permit  of  being  carried  on  simultaneously.     We  all  know 
that  this  feature  of  industry  is  characteristic  of  manufac- 
turing, and  that,  on  the  contrary,  it  is  almost  entirely 
lacking  in  the  case  of  farming. 

4.  The  Character  of  the   Government.  —  A  fourth  con- 
dition of  efficiency  of  organization  is  the  character  of  the 
government.     Even  the  most  advanced  States  differ  in 
many  ways  in  structure  and  in  the  legal  conditions  which 
they  enforce,  but  all  civilized  States  secure  at  least  the 
following  conditions  of  efficient  organization :    they   all 
(1)  maintain  the  institution  of  private  property ;    (2)  pro- 
tect life  and  property  from  enemies  without  and  within 
the  nation's  borders ;   (3)  create  and  maintain  the  institu- 
tion of  contract ;  and  (4)  participate  directly  in  industry  in 
cases  in  which  it  has  been  clearly  proved  that  individuals 
will  not  act  at  all  or  will  not  act  for  the  best  interests  of 
industry  as   a  whole.     Thus,  all   civilized   governments 
maintain  coinage  systems,  regulate  weights  and  measures, 
establish  and  care  for  docks,  lighthouses,  and  roads,  and 
maintain  a  consular  service  in  foreign  lands. 


156        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

VI.  LARGE  SCALE  AND  SMALL  SCALE  PRODUCTION 
COMPARED 

Modern  times  have  witnessed  a  wonderfully  rapid  growth 
in  the  average  size  of  the  individual  business.  Indeed, 
the  change  in  the  size  of  the  business  unit  during  the  past 
half-century  is  almost  as  striking  as  the  change  from 
house  industry  to  factory  industry  in  the  second  half  ol 
the  eighteenth  century.  The  movement  has  gone  so  far 
and  is  still  proceeding  so  rapidly  as  to  excite  very  general 
fear  as  to  its  social  consequences.  Certain  dangers  re- 
sulting from  the  consolidation  of  large  competing  corpora- 
tions will  be  discussed  elsewhere.;  but  it  is  pertinent  at 
this  point,  in  connection  with  the  subject  of  the  organiza- 
tion of  production,  to  advert  briefly  to  the  advantages 
claimed  for  large  scale  production  and  to  the  compen- 
sating advantages  enjoyed  by  small  scale  producers. 

Advantages  of  Large  Scale  Production.  —  The  advantages 
claimed  for  production  on  a  large  scale  resolve  themselves 
into  two  general  classes :  (1)  economies  in  making  the 
goods,  and  (2)  economies  in  marketing  the  goods.  As  to  the 
first,  it  is  claimed  that  in  production  on  a  large  scale  there 
is  a  saving  in  (a)  capital  cost,  per  unit  of  product,  both 
infixed  and  in  circulating  capital;  in  (5)  labor  cost,  owing 
to  the  possibility  of  more  efficient  organization  ;  in  (<?) 
the  possibility  of  making  improvements,  both  through  the 
employment  of  special  investigators  and  inventors,  and 
through  the  comparison  of  methods  in  different  depart- 
ments of  the  same  factory  or  in  the  same  departments  of 
different  factories  under  the  same  ownership ;  in  (rf)  the 
cost  of  superintendence ;  in  (e)  the  utilization  of  waste,  as  is 
instanced  by  the  Standard  Oil  Company  and  the  large 


THE  ORGANIZATION  OF  PRODUCTION  157 

beef  and  pork  packing  companies ;  in  (/)  providing  their 
own  aids  to  making  and  marketing — making  their  own 
cans,  boxes,  etc.,  and  owning  railways  and  steamship  lines, 
etc.  In  businesses  enjoying  this  last  advantage,  we  have 
examples  of  integration  of  industry  as  well  as  of  concen- 
tration of  industry. 

Among  the  second  class  of  advantages  claimed  for  large 
scale  production,  economies  in  marketing  the  goods,  are 
the  following :  (a)  economy  in  securing  trade,  through 
advertising  and  commercial  travellers;  (6)  economy  in 
"carrying"  stocks  of  goods,  a  relatively  smaller  stock  being 
sufficient  to  meet  the  fluctuations  in  demand ;  (c)  economy 
in  getting  goods  to  consumers,  through  the  power  to  secure 
better  freight  rates  for  large  shipments,  and  through  the 
power  possessed  by  some  concerns  to  avoid  "cross  freights"; 
(cT)  economy  in  securing  a  foreign  market,  through  the 
greater  power  of  the  large  concern  to  withstand  the  cut- 
throat competition  common  in  "hard  times." 

The  Strong  Points  of  Small  Scale  Production-  —  Against 
these  alleged  advantages  of  large  scale  production  may  be 
set  the  following  considerations  which  seem  to  promise  a 
continuation  of  a  considerable  measure  of  small  scale  pro- 
duction, at  least  in  certain  lines  of  industry :  (a)  First  of 
all,  it  is  claimed  by  experts  that  in  many  lines  of  business 
a  plant  of  moderate  size  is  the  plant  of  really  maximum  effi- 
ciency in  regard  to  capital  and  labor  costs.  (5)  In  many 
cases  the  advantage  of  the  large  scale  business  in  the 
matter  of  concentration  of  power  is  neutralized  by  the 
fact  that  modern  invention,  especially  in  connection  with 
electricity,  is  revolutionizing  the  methods  of  distribution  of 
power,  putting  the  small  manufacturer  on  a  level  with 
his  greater  rival,  (c)  It  is,  furthermore,  very  doubtful 


158        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

whether  large  scale  producers  can  secure  that  minute  and 
economical  supervision  which  characterizes  small  scale  in- 
dustry ;  whether,  in  other  words,  hired  managers  can  com- 
pete in  this  regard  with  individual  entrepreneurs  who  will 
reap  all  gains  as  they  bear  all  risks,  (d)  The  small  pro- 
ducer has  a  distinct  advantage  in  his  greater  power  to  know 
the  personal  wants  of  his  market.  In  many  industries  the 
personal  element  plays  so  large  a  part  that  the  small  pro- 
ducer will  for  a  long  time  be  able  to  hold  his  own,  even 
if  he  cannot  oust  the  large  producer  from  the  field. 
Finally,  by  cooperation  of  neighboring  small  producers,  it 
is  possible  to  secure  much  the  same  opportunities  as  to  (e) 
invention  and  improvement  of  processes  and  (/)  utilization 
of  "  waste  "  that  we  have  spoken  of  as  regularly  inhering 
in  large  scale  industry. 

It  must  be  borne  in  mind  that  our  comparison  has  been 
between  small  scale  and  large  scale  production,  not  be- 
tween small  scale  production  and  monopolized  production. 
Monopolized  production  is  usually,  though  by  no  means 
always,  production  on  a  large  scale.  But  production  on 
a  large  scale  is  not  at  all  the  same  thing  as  monopolized 
production.  Had  we  been  speaking  of  the  production 
of  monopolized  goods,  it  would  have  been  possible  to  add 
many  to  the  list  of  alleged  advantages  or  economies  in 
production,  and  some  of  the  advantages  of  which  we  have 
spoken  would  in  the  case  of  a  monopoly  have  been  much 
more  marked  and  undisputed.  Thus  in  the  matter  of 
"cross  freights"  and  again  in  the  case  of  advertising, 
many  would  admit  advantages  in  the  case  of  a  monopoly 
who  would  deny  that  they  accrue  simply  to  large  scale 
production. 

This  whole  matter  of  the  relative  advantages  of  small 


THE  ORGANIZATION  OF  PRODUCTION  159 

scale  and  large  scale  production  has  been  of  late  days  the 
subject  of  rather  acrimonious  debate,  and  can  by  no 
means  be  regarded  as  settled.  We  have  chosen,  there- 
fore, to  write  rather  suggestively  than  positively.  For 
this  very  reason,  however,  the  topic  should  furnish  the 
better  material  for  discussions  and  debate  by  the  class. 

SUMMARY 

1.  Growth  in  the  magnitude  of  industry  has  resulted  in  increased 

complexity  of  industrial  organization. 

2.  The  entrepreneur  directs  the  organization  of  the  factors,  but  his 

function  is  sometimes  shared  among  many  individuals. 

3.  Forms  of  organization  of  the  factor  labor  are  simple  associated 

effort,  division  of  occupations,  and  division  of  labor. 

4.  Organization  of  the  factor  nature  gives  rise  to  localization  of  in- 

dustry. 

5.  The  limits  of  profitable  organization  of  industry  are  the  size  and 

character  of  the  population,  the  amount  of  capital,  the  character 
of  the  industry  itself,  and  the  character  of  the  government. 

6.  In  some  industries  there  are  many  advantages  in  production  on  a 

large  scale.  Against  these  may  be  set  other  features  in  which 
the  small  scale  producer  may  hold  his  own,  or  even  enjoy  an 
advantage. 

QUESTIONS 

1.  How  was  cooperation  of  the  factors  secured  before  the  Industrial 

Revolution?  Where  does  this  method  obtain  to-day  in  ad- 
vanced nations  ? 

2.  Name  some  of  the  duties  of  an  entrepreneur. 

3.  Name  the  different  forms  of  business  undertaking.     Discuss  them 

from  the  standpoint  of  their  relative  strength  and  weakness. 

4.  How  does  division  of  occupations  differ  from  division  of  labor  ? 

5.  State  the  advantages  of  the  division  of  labor ;  the  disadvantages ; 

the  advantages  of  large  scale  production;  the  advantages  of 
production  on  a  small  scale. 


160       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

6.  Describe  the  processes  under  a  system  of  divided  labor  in  some 
industry  with  which  you  are  acquainted.  Why  does  not  farm- 
ing lend  itself  to  the  division  of  labor? 

LITERATURE 

Ely,  R.  T. :  Monopolies  and  Trusts,  pp.  187-190. 

Jenks,  J.  W. :  The  Trust  Problem. 

Report  of  the  United  States  Industrial  Commission,  Vol.  II. 

Smith,  Adam  :   Wealth  of  Nations,  Bk.  I,  Ch.  I. 

Von  Halle,  E. :  Trusts  and  Industrial  Combinations,  pp.  30-52. 


PART  III.  — TRANSFERS   OF  GOODS 

CHAPTER  I 
INTRODUCTORY 

The  Nature  of  the  Subject.  —  We  have  now  studied  two 
of  the  main  parts  of  economic  theory.  We  have  learned 
something  regarding  the  consumption  of  goods,  and  also 
something  regarding  their  production.  We  have  now  to 
study  the  question  how  and  by  what  means  goods  are  ex- 
changed among  men,  and  what  determines  the  quantita- 
tive ratios  in  which  they  exchange.  By  the  conditions  of 
modern  industry  almost  every  man  produces  more  of  some 
one  commodity  or  of  some  few  commodities  than  he  him- 
self consumes;  and,  on  the  other  hand,  every  man  con- 
sumes very  many  goods  which  he  himself  has  not  produced. 
This  is  only  possible  because  men  transfer  goods  from  one 
to  another.  Such  transfers  of  goods  constitute  a  very 
great  part  of  our  economic  life.  The  business  of  one 
important  industrial  class,  that  of  merchants,  consists  in 
effecting  such  transfers.  The  operations  in  which  mer- 
chants are  engaged  we  call  by  the  general  name  commerce. 
But  commerce  requires  a  multitude  of  other  businesses  to 
assist  it,  among  which  are  especially  prominent  those  of 
providing  means  of  communication  and  transportation, 
such  as  public  roads,  railways,  telegraphs,  telephones,  and 

M  161 


162        ELEMENTARY  PEINCIPLES  OF  ECONOMICS 

banks.  These  agents  of  commerce,  while  they  do  not 
confine  their  functions  entirely  to  the  assistance  of  mer- 
chants, aid  the  entire  community  in  bringing  about  de- 
sired transfers  of  goods. 

Exchange.  —  Transfers  of  goods  are  of  two  kinds :  they 
may  be  either  one-sided  transfers,  as  in  the  case  of  gifts, 
bequests,  inheritance,  taxes,  and  fines ;  or  they  may  be 
two-sided  transfers,  as  is  the  case  with  nearly  all  eco- 
nomic transfers  with  which  we  have  to  do. 

The  part  of  economics  which  we  are  about  to  study  is 
by  most  economists  called  "  exchange,"  because  the  term 
"exchange,"  referring  to  two-sided  transfers,  covers  so 
many  of  the  transactions  that  are  the  subject  of  our 
study.  But  since  money  and  banks,  which  are  to  be 
treated  in  the  present  part  of  the  book,  are  agencies  in 
assisting  in  one-sided  transfers  as  well  as  two-sided  trans- 
fers of  goods,  we  have  used  the  expression  "  transfers  "  of 
goods  rather  than  the  word  "  exchange  "  to  express  more 
completely  the  nature  of  the  subject. 

Since  exchanges  of  goods  regularly  increase  the  utility 
of  the  goods  exchanged,  it  is  evident  that  exchange  is  a 
part  of  production  and  might  be  treated  under  that  gen- 
eral heading.  But  the  phenomena  of  exchange  are  of  a 
character  so  distinct  and  so  important  that  it  is  considered 
better  to  treat  them  in  a  part  by  themselves. 

Advantages  of  Exchange.  —  It  is  not  uncommon  even 
to-day  to  hear  men  talk  as  if  an  exchange  of  goods  could 
benefit  only  one  of  the  two  exchangers.  Sometimes,  in- 
deed, men  speak  as  if  what  is  gained  by  one  party  to  an 
exchange,  whether  an  individual  or  a  nation,  must  be  at 
the  loss  of  the  other.  We  do  not  stop  to  think  that  when 
we  purchase  a  hat  or  a  suit  of  clothes,  we  regularly  profit 


INTRODUCTORY  163 

by  the  transaction;  but  it  is  evident  that  if  we  did  not 
think  the  thing  purchased  more  useful  to  us  than  the 
money  paid  for  it,  we  would  not  make  the  exchange.  Let 
us  study  for  a  moment  the  reasons  why  men  find  it  profit- 
able to  exchange.  In  the  first  place,  (1)  the  tastes  and 
customs  which  in  part  determine  utility  vary  (a)  from 
nation  to  nation,  and  (6)  from  man  to  man.  It  is  evident, 
then,  that  when  a  commodity  passes  from  an  individual  or 
a  nation  with  little  taste  for  it  to  one  with  a  strong  liking 
for  it,  the  exchange  increases  the  utility  of  the  commodity. 
In  the  second  place,  (2)  the  natural  resources  of  different 
countries  vary  widely.  Goods  which  one  country  or  one 
section  can  easily  have  in  abundance,  another  country  or 
section  may  be  able  to  produce  only  with  great  difficulty. 
Thus,  the  planter  of  the  South  and  the  farmer  of  the 
Northwest  can  both  profit  by  the  exchange  of  the  cotton 
of  the  one  for  the  wheat  of  the  other.  In  the  third  place, 
(3)  individuals  also  differ  from  one  another  either  by 
nature  or  by  training  in  their  fitness  for  different  kinds  of 
work.  Thus,  one  man  is  especially  fitted  by  nature  or  by 
training  for  carpentry,  another  for  milling.  In  all  such 
cases  each  individual  will  find  his  greatest  advantage  in 
doing  that  which  he  can  best  do,  exchanging  the  surplus 
of  his  product  for  other  goods  which  he  desires  but  which 
others  can  produce  to  greater  advantage. 

The  Machinery  of  Transfers.  —  In  every  modern  nation 
there  now  exist  on  a  large  scale  institutions  and  appli- 
ances for  the  furtherance  of  transfers.  These  may  be 
briefly  enumerated  as  follows  :  (1)  means  of  transporta- 
tion and  communication  ;  (2)  systems  of  weights  and 
measures  ;  (3)  money  and  credit  and  banks  ;  (4)  com- 
mercial laws  and  commercial  administration,  including 


164       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

the  assistance  of  consuls  who  act  in  part  as  commer- 
cial agents  of  their  governments  in  foreign  countries  ; 
(5)  middlemen  of  all  sorts,  including  retail  and  whole- 
sale dealers.  Inasmuch  as  exchange  is  a  part  of  produc- 
tion, these  instruments  of  exchange  are  also  instruments 
of  production.  It  is  through  them  that  goods  receive 
the  time  and  place  utilities  which  fit  them  for  final 
consumption. 

SUMMARY 

1.  Transfers  of  goods  are  of  two  kinds:  one-sided  and  two-sided. 

The  latter  are  known  as  exchange,  under  which  heading  this 
general  subject  is  often  treated.  Exchange  develops  the  phe- 
nomena of  value  and  price. 

2.  All  exchange  is  regularly  profitable  to  the  two  parties  to  the 

transfers,  for  the  reasons  that  men  and  places  differ  in  their 
natural  and  acquired  aptitudes  for  different  kinds  of  produc- 
tion, and  that  individuals  and  nations  also  differ  in  their  tastes 
and  customs  in  consumption. 

3.  Modern  industry  has  developed  an  elaborate  mechanism  for  its 

exchanges,  including  means  of  communication  and  transporta- 
tion ;  systems  of  weights  and  measures ;  money  and  credit  and 
banks ;  commercial  laws  and  administration ;  middlemen  of  all 
sorts. 

QUESTIONS 

1.  Give  examples  of  one-sided  transfers;  of  two-sided  transfers. 

2.  What  are  some  of  the  sources  of  advantage  in  exchanges  between 

the  United  States  and  Cuba?    Between  a  lawyer  and  a  doctor? 

3.  Mention  some  of  the  means  of  transportation ;  of  communication. 

4.  How  would  the  adoption  of  international  systems  of  weights  and 

measures  aid  exchanges? 

LITERATURE 

Any  standard  treatise.     See  particularly :  — 

Nicholson,  J.  S. :  Principles  of  Political  Economy,  VoL  II,  Ch.  I,  pp. 
3-10. 


CHAPTER  II 
VALUE 

Meaning  of  the  Term.  —  One  of  the  most  important  and 
difficult  problems  in  economics,  and  the  central  problem 
in  transfers  or  exchange,  as  well  as  in  distribution,  is  that 
of  the  determination  of  value.  Why  do  goods  exchange 
one  for  another  in  the  proportions  that  they  do?  Why 
do  the  proportions  in  which  they  exchange  vary  from  time 
to  time  ?  This  is  the  problem  which  we  now  have  to 
study. 

First  of  all  we  must  note  that  there  are  two  closely 
related  but  distinct  ideas  of  value,  which  have  been  called 
by  the  names  "subjective  value"  and  "objective  value." 
Let  us  try  to  get  an  understanding  of  these  ideas  and 
of  the  relation  between  them.  Our  study  of  the  law  of 
diminishing  utility  has  shown  us  that  as  our  stock  of  any 
commodity  increases,  the  marginal  utility  falls  ;  that  is, 
we  care  less  for  an  additional  portion  of  it.  We  satisfy 
our  most  intense  wants  first,  and,  as  our  supply  increases, 
our  unsatisfied  wants  grow  less  and  less  urgent.  If,  for 
example,  we  had  but  a  very  small  supply  of  water,  we 
should  use  it  for  drinking  purposes  only  :  a  first  increase 
might  be  used  for  bathing  ;  a  second,  for  washing  dishes 
and  clothes,  and  so  on.  The  more  the  supply  increases, 
the  less  capacity  would  a  gallon  have  to  excite  our  desire, 
the  less  sacrifice  would  we  undergo  to  get  an  additional 
gallon,  and  the  less  should  we  trouble  ourselves  about  the 

165 


166       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

loss  of  a  gallon.  It  is  the  marginal  utility  that  determines 
the  economic  importance  of  any  commodity  in  our  estima- 
tion. These  phrases,  "  capacity  to  excite  desire,  marginal 
utility,  economic  importance,"  are  synonymous  with  the 
term  "  subjective  value."  For  a  brief  definition,  we  may  say, 
"  subjective  value  is  the  capacity  to  excite  desire."  Notice 
the  close  relation  and  yet  the  sharp  contrast  here  between 
utility  and  subjective  value.  A  cubic  foot  of  air  has 
great  utility,  but  it  has  no  value.  Yet  anything,  to 
have  value,  must  have  utility,  since  it  is  utility  under  a 
condition  of  scarcity  that  excites  desire.  We  may  sum 
up  the  relation  of  the  two  things  thus :  utility  is  the  power 
to  satisfy  wants  ;  subjective  value  is  the  power  to  excite  desire, 

How  Subjective  Value  is  Determined.  —  It  is  now  easy 
to  see  how  subjective  value  is  determined.  It  is  utility 
under  a  condition  of  scarcity.  To  possess  value,  a  thing 
must  be  able  to  satisfy  wants,  and  it  must  exist  in  less 
than  sufficient  quantity  to  satisfy  all  wants. 

The  Idea  of  Objective  or  Exchange  Value.  —  The  idea  of 
objective  or  exchange  value  is  a  simple  one.  Objective 
value  is  the  quantitative  ratio  in  which  goods  or  services  are 
exchanged.  Thus,  if  a  pound  of  butter  exchanges  for  four 
pounds  of  sugar,  we  say  that  it  is  worth  four  pounds  of 
sugar,  or  that  its  value  in  terms  of  sugar  is  four  pounds 
of  that  commodity.  In  our  day  most  commodities  are 
exchanged  directly  for  the  single  commodity  money,  and 
are  exchanged  only  indirectly  for  those  goods  or  services 
which  we  consume.  It  results  that  we  usually  think  of 
value  in  terms  of  money  ;  that  is,  we  think  of  prices. 
For  price  is  objective  value  expressed  in  terms  of  money. 
But  if  a  unit  of  one  commodity  exchanges  for  one  dollar, 
while  a  unit  of  another  commodity  exchanges  for  two 


VALUE  167 

dollars,  it  is  evident  that  the  value  of  the  first  commodity 
is  one-half  that  of  the  second. 

The  Relation  of  Objective  to  Subjective  Value.  —  And 
now  let  us  compare  the  two  ideas  of  value.  Let  us 
see  how  out  of  these  individual  valuations  there  results 
an  objective  market  value.  Imagine  a  market  to  which 
eight  farmers  have  each  brought  a  load  of  corn  to  sell,  and 
to  which  eight  other  persons  have  come,  each  of  whom 
wishes  to  buy  a  load.  Suppose  each  seller  to  have  settled 
upon  a  price  per  bushel  less  than  which  he  does  not  wish 
to  take,  and  suppose  each  buyer  to  have  fixed  a  price  more 
than  which  he  does  not  intend  to  pay.  Let  these  esti- 
mates be  as  follows  :  — 

Buyers'  maximum  prices  :  69,  67,  65,  63,  61,  60,  59,  58. 
Sellers'  minimum  prices  :  70,  69,  68,  64,  62,  60,  59,  58. 

Assuming  that  each  one  is  alive  to  his  own  interest,  and 
that  he  does  not  make  a  bargain  until  he  is  sure  that  he 
cannot  do  better,  what  will  be  the  market  price  of  corn 
per  bushel  ? 

The  price  evidently  cannot  be  70  cents,  for  no  buyer 
will  pay  so  much  ;  it  cannot  be  65,  for  since  five  are 
willing  to  sell  at  this  price  and  only  three  to  buy,  the 
competition  of  the  five  in  their  efforts  to  sell  to  the  three 
must  bring  down  the  price.  Continuing  to  test  each  pos- 
sible price  in  this  way,  we  get  the  following  table :  — 

At  64  cents  there  are  3  buyers  and  5  sellers. 
At  63  cents  there  are  4  buyers  and  4  sellers. 
At  62^  cents  there  are  4  buyers  and  4  sellers. 
At  62  cents  there  are  4  buyers  and  4  sellers. 
At  61  cents  there  are  5  buyers  and  3  sellers. 

It  appears  that  at  62  and  at  63  cents  (or  at  any  price 
between)  there  are  as  many  buyers  as  sellers,  namely 


168       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

four,  and  that  four  loads  will  be  sold  at  a  price  some- 
where between  these  limits.  These  are  the  prices  at 
which  demand  and  supply  are  equal. 

The  actual  buyers  in  this  market  are  those  with  the 
estimates  69,  67,  65,  63.  The  last  of  these  is  called  the 
marginal  buyer,  because  with  a  rise  in  the  price  he  would 
be  the  first  to  be  excluded.  The  actual  sellers  are  those 
with  the  estimates  62,  60,  59,  58.  The  first  of  these  is 
called  the  marginal  seller,  because  with  a  fall  in  the  price 
he  would  be  the  first  to  be  excluded.  Notice  that  the 
marginal  buyer's  estimate  —  the  marginal  demand  price 
—  is  about  equal  to  the  marginal  seller's  estimate  —  the 
marginal  supply  price.  We  may  say,  then,  that  the  market 
price  is  an  equilibrium  between  the  existing  state  of  the  sup- 
ply and  the  existing  state  of  demand.  In  a  previous  chap- 
ter on  Demand  we  have  sufficiently  considered  the  forces 
lying  back  of  the  buyers'  estimates.  We  must  now 
inquire  into  the  forces  governing  the  sellers'  estimates, 
that  is,  those  lying  back  of  supply. 

Different  Causes  of  Scarcity.  —  Scarcity  is  not  every- 
where the  result  of  the  same  cause.  First,  (1)  we  may 
have  absolute  scarcity,  as  in  the  case  of  paintings  by  old 
masters,  unique  natural  products,  etc.  In  such  cases  the 
quantity  cannot  be  increased  at  all.  This  class  of  goods 
is  not  very  important.  Secondly,  (2)  we  may  have  mo- 
nopoly scarcity,  a  scarcity  caused  by  the  fact  that  the 
quantity  is  under  the  control  of  one  or  more  persons  who 
act  together  to  control  the  offerings  of  such  goods  to 
society.  The  case  of  monopoly  goods  will  be  discussed 
separately  and  at  length  in  the  following  chapter.  Finally, 
(3)  we  may  have  scarcity  caused  simply  by  the  fact  that  men 
must  undergo  sacrifice  in  order  to  increase  the  quantity.  The 


VALUE  169 

greater  proportion  of  the  goods  which  we  consume  fall  into 
this  class.  A  simple  way  of  describing  such  goods  would 
be  to  say  that  they  are  freely  produced. 

Cost  of  Production  and  Value.  —  The  value  of  this  third 
class  of  goods  is  due  to  precisely  the  same  cause  that  lies 
back  of  the  value  of  all  goods,  namely,  utility  under  a  condi- 
tion of  scarcity.  But  it  is  commonly  said  that  with  these 
freely  reproducible  goods,  cost  of  production  determines 
value.  It  is  true  that  the  price  of  these  goods  is  not  far 
from  their  expenses  of  production.  It  is  easy  to  see  why:  If 
any  article  is  selling  for  $5  when  the  expense  of  produc- 
ing it  is  only  $1,  many  persons  will  turn  to  the  manufac- 
ture of  this  article,  the  supply  is  increased,  and  the  price 
falls  to  something  like  $1.  But  what  determines  the  ex- 
penses of  production  ?  Why  cannot  a  baker,  for  example, 
sell  bread  for  much  less  than  five  cents  a  loaf  ?  To  say 
that  he  must  pay  a  certain  price  for  flour  among  other 
things,  is  merely  to  put  the  difficulty  one  step  farther  off. 
Why  will  all  those  who  immediately  or  remotely  help  to 
make  the  flour  not  work  for  less  ?  There  are  two  possible 
answers :  They  might  in  some  cases  prefer  to  be  idle 
rather  than  work  for  less,  or  they  might  feel  that  they 
were  sacrificing  the  opportunity  of  making  something  else 
for  which  there  are  equally  urgent  wants.  Here  we  have 
the  fundamental  sense  in  which  cost  of  production  limits 
the  supply  of  an  article :  It  is  either  because  of  the  pain 
of  further  work  or  abstinence,  or  because  by  making  one 
article  there  is  sacrificed  the  opportunity  of  making 
another.  The  supply  of  snow-shovellers  is  limited  partly 
because  some  boys  prefer  to  coast  rather  than  to  work, 
and  partly  because  other  boys  who  are  willing  to  work 
find  that  there  is  opportunity  of  earning  more  by  minis- 


170       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

tering  to  the  wants  of  other  people  than  those  who  have 
snow  to  shovel. 

Back  of  the  expenses  for  labor,  raw  material,  etc.,  which 
the  business  man  has  in  mind  when  he  speaks  of  cost  of 
production,  lie  these  real  sacrifices  of  production.  The 
exact  connection  between  the  two  is  not  always  easy  to 
trace,  and  in  studying  many  problems  in  business  it  is  suf- 
ficient to  pay  attention  only  to  the  expenses  of  production. 
In  the  remainder  of  this  chapter  we  shall  use  the  term 
"  cost  of  production  "  in  this  sense. 

In  discussing  the  conditions  governing  the  supply  of  freely 
reproducible  commodities,  many  writers  distinguish  three 
classes,  as  follows :  (a)  those  that  can  be  increased  in  quantity 
without  proportionate  increase  in  cost ;  (6)  those  that  can  be 
increased  at  a  proportionate  cost;  and  (c)  those  that  can  be 
increased  in  quantity  only  by  a  more  than  proportionate  in- 
crease of  cost.  The  difference  may  be  briefly  expressed  by  say- 
ing that  production  in  the  first  case  conforms  to  the  law  of 
increasing  returns  or  diminishing  costs;  in  the  second  case, 
to  the  law  of  proportionate  returns ;  in  the  third  case,  to  the  law 
of  diminishing  returns  or  increasing  costs. 

It  is  to  be  questioned  whether  there  is  any  industry  in  which 
the  law  of  increasing  returns  operates  indefinitely  or  until  the 
whole  market  is  supplied.  It  may  be  true  of  transportation  or 
other  natural  monopolies,  although  it  is  doubtful.  But  there  is 
a  competitive  field  in  which  it  clearly  does  not  operate  without 
limit.  In  agriculture,  manufactures,  and  commerce  there  is  at 
first  an  increasing  return,  possibly  for  a  time  a  constant  return, 
and  then  a  diminishing  return  as  the  establishment  grows  in  size. 
Sooner  or  later  the  point  of  maximum  efficiency  is  reached,  and 
then  the  law  of  increasing  costs  begins  to  operate.  It  is  clear 
that  in  agriculture  that  limit  is  reached  rather  quickly,  while  a 
textile  factory  can  reach  a  large  size  before  the  point  of  maximum 
efficiency  is  reached.  If  it  were  not  for  this  limited  operation  of 
the  law  of  increasing  returns,  we  should  have  present  the  con- 


VALUE  171 

ditions  for  a  growth  of  monopoly  over  the  entire  industrial 
field,  inasmuch  as  the  largest  producers  could  undersell  all 
others. 

Marginal  Costs  Explained.  —  In  the  industrial  world,  as 
it  is  constituted,  the  actual  costs  of  production  are  not  the 
same  for  all  units  of  supply,  no  matter  whether  the  sup- 
ply be  large  or  small.  Thus,  in  the  case  of  agriculture, 
some  farmers  have  more  fertile  or  better  situated  farms 
than  others.  In  manufactures,  the  same  difference  obtains 
though  in  a  much  slighter  degree.  Some  entrepreneurs  are 
better  organizers  than  others ;  some  have  better  situations 
with  reference  to  the  raw  materials  or  to  the  market,  etc. 
The  costs  being  thus  different,  what  are  the  costs  which 
determine  value  on  the  side  of  supply?  It  cannot  be  the 
least  cost  or  the  average  cost,  for  in  either  case  a  large 
part  of  the  product  would  be  sold  for  less  than  its  cost. 
It  follows  that  the  determining  costs  are  the  greatest,  or 
as  we  may  call  them,  the  marginal  costs  of  producing  that 
supply  which  will  be  in  equilibrium  with  the  existing  demand. 

The  "  Frictional  Elements  "  Considered.  —  In  order  that 
there  might  be  perfect  competition,  it  would  be  necessary 
that  every  producer  should  always  know  and  seek  his  own 
economic  interest;  that  he  should  be  able  to  throw  his 
labor,  his  capital,  and  his  land  from  one  occupation  to  an- 
other or  to  no  occupation  at  all  at  a  moment's  notice,  and 
without  that  loss  which  the  vis  inertice  of  business  actually 
occasions  in  such  cases.  From  the  fact  that  these  condi- 
tions are  only  imperfectly  realized,  it  results  that  the  prices 
of  commodities  day  by  day,  or,  as  they  are  called,  the  mar- 
ket prices,  fluctuate  according  to  the  importance  of  the 
frictional  elements  present,  as  well  as  with  changes  in  the 
state  of  demand  and  changes  in  the  costs  of  production. 


1T2        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

But  the  market  price  of  competitive  goods  is  kept  from 
violent  fluctuations  by  the  fact  that  competition  is  also 
present,  and  that  so  far  as  the  competition  is  free  and  com- 
plete it  is  working  to  produce  harmony  between  demand 
and  supply,  between  marginal  utility  and  marginal  cost, 
between  producer  and  consumer. 

It  remains  for  us  to  consider  briefly  but  in  detail  some  of 
the  frictional  elements  which  are  most  frequently  present  in 
modern  business,  preventing  the  realization  of  the  perfectly 
competitive  price. 

1.  Custom.  —  One  influence  which  we  have  to  notice  as 
being  opposed  to  competition  is  that  of  custom.     By  force  of 
custom,  acting  especially  in  retail  markets,  the  prices  of  com- 
modities may  stand  for  some  time  above   the  normal  level. 
It  is  evident,  however,  that  custom  is  powerless  to  maintain  a 
price  below  the  normal,  unless  the  seller  has  some  economic 
advantage   that  he  is  willing  to   share  with  his  customers. 
Otherwise  such  a  price  would  spell  ruin  for  the  retail  dealer. 

2.  Immobility  of  Labor.  —  A  second  frictional  element  is  the 
immobility  of  labor.     Our  law  of  value  assumes  a  competition 
by  which  laborers  will  move  freely  from  place  to  place,  and 
from  occupation  to  occupation.     There  are  very  many  cases  in 
which  the  facts  of  real  life  do  not  accord  with  this  assumption, 
although  it  is  true  that  with  advancing  civilization  such  com- 
petition approaches  nearer  and   nearer  to  realization.     It  is 
easier  than  ever  before  for  men  to  travel  from  places  in  which 
labor  is  plentiful  to  places  in  which  labor  is  scarce.     On  the 
whole,  it  is  easier  than  ever  before  for  men  to  transfer  their 
labor  from  one  industry  to  another.     Especially  is  it  easier  in 
our  day  for  parents  to  choose  the  occupations  for  which  they 
will  train  their  children.     But  inasmuch  as  laborers  are  often 
prevented  even  now  by  home  ties,  or  poverty,  or  ignorance, 
from  carrying  their  labor  to  the  best  market  for  it,  and  inas- 
much as  they  are  similarly  prevented  in  many  cases  from  enter- 
ing into  occupations  which  might  prove  more  remunerative,  it 


VALUE  173 

often  happens  that  labor  in  different  places  or  in  different 
occupations  is  not  rewarded  in  proportion  to  the  sacrifice  in- 
volved. In  such  cases,  although  the  supply  of  the  commodity 
may  be  determined  by  the  cost  of  production,  yet  the  cost  of 
production  of  different  commodities  will  not  be  proportioned 
to  the  actual  sacrifices  incurred,  and  there  is  in  such  cases 
an  apparent  rather  than  a  real  exception  to  our  theory  of 
value. 

3.  Unequal  Taxation.  —  Unequal  taxation  also  gives  rise  to 
exceptions  to  our  theory  of  value,  unless  we  are  prepared  to 
regard  taxes  themselves  as  a  part  of  the  cost  of  production.    If 
taxes  were  laid  in  equal  proportions  upon  all  industries,  so  that 
all  products  were  raised  in  price  in  equal  proportion,  then  the 
ratio  in  which  different  commodities  would  exchange  for  one 
another  might  remain  the  same.    In  other  words,  values  might 
not  be  affected.     But  such  taxation  is  clearly  impossible,  and 
therefore  we  are  obliged  to  qualify  in  this  regard  our  theory  of 
value. 

4.  Planless  Production.  —  In  our  complex  industrial  system 
producers  have  to  plan  their  production  for  distant  times  and 
distant  places,  and  in  ignorance  of  what  rival  producers  are 
doing.     It  can  easily  be  seen  that  in  such  a  state  of  things  the 
production  of  some  commodities  may  be  carried  far  beyond  the 
point  at  which  the  demand  for  the  commodity  is  great  enough 
to  permit  a  price  that  will  repay  the  cost  of  production.     The 
resulting  glut  in  the  market  may  continue  for  some  time  before 
the  entrepreneurs  by  lessening  production  can  secure  a  return 
to  normal  prices.     The  technical  condition  of  modern  industry 
contributes  strongly  to  the  same  result  as  that  just  described. 
When  a  producer  has  invested  large  amounts  of  capital  in  the 
form  of  expensive  buildings  and  expensive  machinery,  he  is  not 
unlikely  to  continue  production  even  when  the  price  of  the 
product  is  too  low  to   repay  all   the  costs.     For  when  such 
large  fixed  capitals  remain  idle,  the  abstinence  involved  in  the 
production  of  that  capital  is  receiving  no  reward  at  all,  to  say 
nothing  of  the  fact  that  the  buildings  and  machinery  may 
actually  be   deteriorating  more   rapidly  than   they  would  if 


174        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

they  were  busy.  The  entrepreneur,  therefore,  has  to  choose, 
not  between  gain  and  loss,  but  between  a  greater  and  a  lesser 
loss,  and  in  choosing  the  lesser  loss,  he  may  keep  buildings  and 
machinery  working  even  when  the  market  is  glutted  with  the 
commodity  which  he  is  producing.  It  is  for  this  reason  among 
others  that  in  modern  days  industrial  depression,  when  it  comes, 
is  so  long  continued  and  distressful.  Prices  cannot  easily  or 
rapidly  return  to  their  normally  competitive  level  when  supply 
greatly  outruns  profitable  demand. 

5.  Value  of  Products  and  By-products.  —  The  fifth  case,  that 
of  products  and  by-products,  really  accords  with  our  theory  of 
value,  but  requires  special  attention.  When  as  an  incident  to 
one  main  line  of  production,  one  or  more  products  of  less  sig- 
nificance result,  the  chief  commodity  is  called  the  product  and 
the  others  by-products.  Thus  wheat  is  a  main  product  of 
which  straw  is  a  by-product.  To  take  another  illustration,  the 
Standard  Oil  Company  has  as  its  central  industry  the  refining 
of  crude  petroleum  into  illuminating  oils,  but  with  every  year 
scientific  discoveries  have  made  possible  new  uses  for  parts  of 
the  crude  oil  which  were  formerly  thrown  away.  These  inci- 
dents to  the  production  of  illuminating  oil,  or  by-products  as 
they  are  called,  include  lubricating  oils,  aniline  dyes,  paraffin, 
etc.  In  such  cases  it  is  evident  that  the  theory  of  value  is 
complicated  in  its  application.  The  general  principle  to  be 
noticed  is  that  the  combined  value  of  the  products  is  deter- 
mined by  the  total  cost  of  production.  Producers,  of  course, 
regulate  the  production  of  the  joint  products  so  as  to  secure 
the  largest  total  return.  This  is  commonly  done  by  producing 
all  of  the  main  product  that  can  be  sold  at  profitable  prices,  at 
the  same  time  selling  the  by-products  at  such  prices  as  will 
insure  their  sale.  In  such  cases,  if  the  demand  for  the  prin- 
cipal product  increases,  production  also  increases,  and  as  larger 
quantities  of  the  by-product  naturally  result,  these  must  be 
sold  at  lower  prices,  unless  it  happens,  as  is  unlikely,  that  the 
demand  for  the  by-products  increases  at  the  same  time  and  at 
the  same  rate  as  does  the  demand  for  the  main  product.  Some- 
times the  demand  for  the  by-product  increases  so  greatly  as  to 


VALUE  175 

make  it  profitable  to  regulate  production  according  to  its  price 
rather  than  according  to  the  price  of  the  main  product.  Thus 
in  the  case  of  mutton  and  wool,  some  sheep  raisers  are  so 
situated  that  wool  is  the  main  product  of  their  business,  and 
mutton  a  by-product,  while  with  other  producers  the  order  is 
reversed.  We  may  say  in  conclusion,  then,  that  the  total 
prices  of  products  and  by-products  are  determined  by  total 
costs,  and  that  the  relative  prices  are  determined,  subject  to 
this  condition,  by  the  relative  market  demand  for  the  different 
commodities. 

SUMMARY 

1.  Subjective  value  is  the  capacity  of  any  good  to  command  a  sacri- 

fice. Objective  or  exchange  value  is  the  quantitative  ratio  in 
which  any  two  goods  exchange.  The  second  sort  of  value  de- 
pends upon  the  first. 

2.  Competitive  value  is  the  meeting  point,  or  point  of  equilibrium, 

between  supply  and  demand. 

3.  Different  conditions  of  scarcity  are  :  absolute  scarcity,  monopoly 

scarcity,  and  scarcity  due  to  the  sacrifices  of  production. 

4.  Cost  of  production,  which  controls  supply,  is  used  in  at  least  three 

senses:  expenses  of  production,  pains  of  production,  and  sacrifice 
of  opportunity. 

5.  The  effective  cost  of  any  quantity  of  a  good  is  the  highest  or  mar- 

ginal cost  of  producing  that  quantity. 

6.  Perfect  competition  is  rarely  if  ever  realized. 

7.  Frictional  elements  interfere  with  the  free  working  of  competition. 

QUESTIONS 

1.  What  is  subjective  value  ?  Objective  value?  What  is  their  relation? 

2.  Show  how  a  market  price  is  determined. 

3.  Describe  the  three  causes  of  scarcity  of  economic  goods. 

4.  What  are  the  various  meanings  of  the  term  "cost  of  production"? 

5.  What  is  meant  by  marginal  costs? 

6.  What  are  some  of  the  actual  conditions  opposed  to  the  free  work- 

ing of  competition? 


176        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 


LITERATURE 

Cairnes,  J.  E. :  Some  Leading  Principles  of  Political  Economy,  Part  I, 

Ch.  Ill,  §  5. 

Clark,  J.  B. :  The  Distribution  of  Wealth,  Ch.  XIX. 
Davenport,  H.  J. :  "  Proposed  Modifications  in  Austrian  Theory  and 

Terminology,"  Quarterly  Journal  of  Economics,  Vol.  XVI,  1902, 

p.  355. 

Hobson,  J.  A. :  The  Economics  of  Distribution,  Ch.  I. 
Jevons,  W.  S. :  Theory  of  Political  Economy,  Chs.  Ill  and  IV. 
Marshall,  A. :  Principles  of  Economics,  Bk.  V,  Ch.  Ill,  §  5. 
Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  Ill,  Ch.  I,  §  2. 
Smart,  W. :  Introduction  to  the  Theory  of  Value,  Chs.  V  and  X. 


CHAPTER   III 
MONOPOLIES   AND   MONOPOLY  VALUE 

IN  the  preceding  chapter  we  reached  the  conclusion 
that  in  the  case  of  goods  freely  produced  under  competi- 
tive conditions,  value  is  determined  on  the  side  of  demand 
by  the  marginal  utility,  and  on  the  side  of  supply  by  the 
marginal  cost  of  production.  At  the  same  time  it  was 
pointed  out  that  not  all  goods  are  thus  produced.  The 
largest  and  most  important  class  of  such  exceptional  goods 
consists  of  those  produced  by  monopolists.  In  order  to 
complete  our  theory  of  value,  therefore,  we  must  now 
inquire  how  monopoly  value  is  determined ;  and  that  we 
may  do  this  the  more  understandingly,  let  us  first  see  what 
monopoly  is. 

Definition  and  Classification.  —  It  will  be  well  for  the 
student  to  study  very  carefully  the  following  definition, 
inquiring  at  every  step  just  what  the  words  and  phrases 
mean  :  Monopoly  means  that  substantial  unity  of  action,  on 
the  part  of  one  or  more  persons  engaged  in  some  kind  of  busi- 
ness, which  gives  exclusive  control,  more  particularly,  although 
not  solely,  with  respect  to  price. 

Many  classifications  of  monopolies  have  been  made  by 
different  writers,  and  still  others  might  be  made  ;  but  it  is 
believed  that  the  following  classification,  which  both  ex- 
plains the  origin  of  the  different  monopolies  and  suggests 
their  real  nature,  will  prove  as  helpful  as  any  to  the  stu- 
dent :  — 

»  177 


178       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

A.  Social  Monopolies. 

I.    General  Welfare  Monopolies. 

1.  Patents. 

2.  Copyrights. 

3.  Trade-marks. 

4.  Public  consumption  monopolies. 

5.  Fiscal  monopolies. 

II.    Special  privilege  monopolies. 

1.  Those  based  on  public  favoritism. 

2.  Those  based  on  private  favoritism. 

B.  Natural  Monopolies. 

I.    Those  arising  from  limitation  of  supply  of  raw 

material. 
II.    Those  arising  from  peculiar  properties  inherent 

in  the  business. 
III.   Those  arising  from  secrecy. 

Social  Monopolies.  —  Businesses  are  social  monopolies 
when  they  are  made  monopolies  not  by  their  own  inherent 
properties,  but  either  by  legislative  enactment  or  by  forming 
so  close  a  connection  with  great  natural  monopolies  that  they 
partake  of  the  nature  of  the  latter. 

In  old  times  kings  and  queens  frequently  granted  ex- 
clusive business  privileges  to  favored  persons,  and  per- 
mitted no  one  except  those  named  to  engage  in  such 
undertakings.  Such  monopolies,  however,  became  so 
odious  that  sovereigns  were  compelled  to  cease  granting 
them.  Governments  still  create  exclusive  privileges  by 
patent  and  copyright  laws,  but  they  do  so  in  behalf  of  the 
general  public.  Authors  and  inventors  are  given  exclu- 
sive rights  over  their  productions  for  a  limited  period. 
These  monopolies  have  perhaps  justified  themselves 


MONOPOLIES  AND  MONOPOLY  VALUE  179 

through  the  stimulus  which  they  have  given  to  invention 
and  authorship.  Yet  it  must  not  be  forgotten  that  all 
intellectual  achievements  are  in  part  a  social  product,  — 
that  they  are  due  in  great  measure  to  earlier  achievement. 
The  telephone  was  preceded  by  a  century  of  scientific 
invention  and  discovery  along  the  line  of  sound  trans- 
mission, and  most  of  that  investigation  was  very  ill  re- 
warded. On  the  whole,  experience  seems  to  justify  the 
conclusion  that  patents  and  copyrights  are  beneficial,  but 
that  patents  do  not  rest  on  so  strong  a  basis  as  do  copy- 
rights, since  no  two  persons  would  ever  write  precisely 
the  same  book. 

The  trade-mark  is  a  legal  monopoly  similar  to  the  patent 
and  the  copyright.  In  connection  with  lavish  advertising, 
trade-marks  in  recent  days  have  been  made  the  basis  of 
enormous  profits. 

Public  consumption  monopolies  and  fiscal  monopolies 
call  for  a  word  of  special  comment.  They  are  to  be  dis- 
tinguished the  one  from  the  other  only  by  the  object  which 
the  government  has  in  view  in  establishing  them.  If  the 
government  manages  for  itself  or  grants  to  another  a  mo- 
nopoly of  the  liquor  traffic  with  the  object  of  regulating 
the  consumption,  the  monopoly  is  a  public  consumption 
monopoly.  If,  on  the  other  hand,  the  chief  object  is  not 
regulation  but  income,  the  monopoly  is  a  fiscal  one.  Often 
the  two  objects  are  so  blended  that  it  is  difficult  or  impos- 
sible to  name  the  resulting  monopoly. 

Our  classification  names  two  kinds  of  special  privilege 
monopolies.  Those  monopolies  which  are  due  to  special 
tariff  advantages  or  to  other  legislation  are  rightly  said  to 
be  based  on  public  favoritism.  The  other  class  of  special 
privilege  monopolies  consists  of  those  which  grow  up 


180        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

through  special  favors  granted  by  other  monopolies,  espe- 
cially natural  monopolies,  such  as  railways. 

Natural  Monopolies.  —  Natural  monopolies  are  those 
which  depend  for  their  existence  on  natural  forces  as  distin- 
guished from  social  arrangements.  They  grow  up  inde- 
pendently of  man's  will  and  desire,  and  sometimes  even  in 
direct  opposition  to  it.  The  words  which  we  have  used 
in  our  classification  will  sufficiently  explain  the  different 
sources  from  which  they  arise.  By  far  the  most  impor- 
tant of  all  monopolies  are  natural  monopolies  of  the  second 
class,  chief  among  which  are  the  following :  wagon  roads 
and  streets,  canals,  docks,  bridges  and  ferries,  waterways, 
harbors,  lighthouses,  railways,  telegraphs,  telephones,  the 
post-office,  electric  lighting,  waterworks,  gasworks,  street 
railways  of  all  kinds.  Whenever  there  is  a  decided  incre- 
ment in  gain  resulting  from  combination,  we  have  a  tendency 
to  monopoly  which  will  overcome  all  obstacles.  This  incre- 
ment of  gain,  which  is  the  cause  of  monopoly,  is  always  pres- 
ent in  businesses  that  occupy  peculiarly  favorable  spots  or 
lines  of  land,  and  that  furnish  services  or  commodities  which 
must  be  used  in  connection  with  the  plant.  This  may  be 
said  to  be  the  law  of  natural  monopolies. 

Of  late  years  there  have  been  many  economists  who  argue 
that  monopoly  may  naturally  arise  without  any  of  the  advan- 
tages that  have  been  indicated,  through  the  superior  power  of 
great  capital  and  the  superior  economy  of  great  concentration. 
They  would  call  such  monopolies  capitalistic.  There  is  not 
space  to  give  all  the  reasons  for  dissenting  from  this  conclu- 
sion regarding  so-called  capitalistic  monopolies.  One  or  two 
very  cogent  reasons  may,  however,  be  stated.  An  exhaustive 
study  of  the  cases  cited  in  support  of  the  alleged  tendency  to 
monopoly  inherent  in  large  capital  has  failed  to  reveal  a  single 
one  in  which  the  monopoly  did  not  enjoy  one  or  many  of  those 


MONOPOLIES  AND  MONOPOLY  VALUE  181 

monopoly  advantages  which  we  have  already  mentioned  and 
explained.  Moreover,  many  cases  in  which  the  possession  of 
large  capital  seemed  on  the  surface  to  be  a  dominating  influ- 
ence, have  been  cases  in  which  the  monopoly  was  so  short-lived 
as  to  furnish  little  support  to  the  argument  of  those  who  cited 
them.  After  all,  whatever  may  be  the  advantage  conferred  by 
large  capital,  we  must  remember  that  capital  is  so  plentiful 
that  one  gigantic  plant  can  always  find  a  rival  whenever  a 
slight  margin  of  profit  invites  its  establishment. 

Our  conclusion  then  may  be  stated  as  follows :  There 
is  a  great  and  growing  field  of  industry  in  which  competi- 
tion is  not  natural  or  permanently  possible,  for  reasons 
explained  in  the  text ;  there  is  another  field  within  which 
monopoly  may  easily  be  engendered  by  unwise  social  ac- 
tion, and  which  is  likely  to  become  narrower  as  the  nation 
grows  in  intelligence  and  thoughtfulness ;  and  finally  there 
is  a  third  field  within  which  natural  monopoly  does  not 
and  cannot  exist,  and  within  which  social  monopoly  is 
unlikely  to  arise. 

Determination  of  Monopoly  Price.  —  And  now,  having 
seen  what  monopoly  is,  we  may  attempt  an  answer  to  the 
question,  How  is  monopoly  value  or  monopoly  price 
determined  ? 

First  of  all,  we  may  say  that  monopoly  value,  like  any 
other  value,  is  determined  by  the  relation  between  demand 
and  supply,  and  that  demand  is  here  as  elsewhere  determined 
by  marginal  utility.  But  the  supply  is  not  determined  as 
under  competition  by  the  cost  of  production,  but  by  the 
desire  of  the  monopolist  to  secure  the  maximum  of  revenue 
possible  in  the  existing  state  of  demand.  In  other  words, 
the  monopolist,  freed  from  competition,  and  governed 
only  by  demand,  is  able  to  adjust  supply  to  demand  in 


such  a  way  that  the  price  will  stand  at  the  point  of  high- 
est net  return.  In  determining  what  price  shall  be  fixed 
and  what  quantity  supplied, — in  other  words,  what  is  the 
point  of  highest  net  returns,  —  the  monopolist  consciously 
or  unconsciously  proceeds  according  to  the  following 
principles :  — 

1.  He  realizes  that  every  increase  in  the  supply  of  his 
monopolized  product  will  result  in  lowering  the  marginal 
utility,  and  hence  the  demand  price  of  the  product,  while 
every  decrease  in  the  supply  will  result  in  a  higher  mar- 
ginal utility,  and  hence  a  higher  price. 

2.  Of  the  expenses  of  production  there  are  some  that 
vary  in  almost  regular  proportion  with  the  variation  in 
the  supply.     Thus  if  the  product  is  doubled,  the  cost  of 
raw  material  will  be  just  about  doubled.     Such  expenses 
are  called  variable  expenses. 

3.  Other  expenses,  within  certain  limits,  remain  more 
nearly  the  same,  no  matter  what  may  be  the  amount  of  the 
product.    These,  called  i\\&  fixed  expenses,  would  include  the 
cost  of  plant,  salary  of  superintendent,  interest  on  bonds,  etc. 

It  follows  from  the  above  principles  that  the  monopo- 
list, since  he  is  seeking  the  maximum  net  revenue  from 
his  business,  will  pay  no  attention  to  fixed  charges  in 
establishing  the  price  of  the  product,  but  will  consider 
only  the  variable  expenses  in  connection  with  the  probable 
demand  for  his  goods  at  various  prices. 

An  Illustration. — We  may  illustrate  by  an  example  the 
operation  of  these  principles.  The  following  table  shows 
in  parallel  columns  the  number  of  sales  of  a  monopolized 
good  at  different  prices ;  the  total  resultant  earnings  ;  the 
variable  expenses ;  the  fixed  expenses ;  the  total  expenses ; 
and  finally  the  net  revenue  or  monopoly  profit :  — 


MONOPOLIES  AND  MONOPOLY  VALUE 


183 


TOTAL 

PER 

UNIT 

NUMBER 

SALES 

TOTAL 

EARNINGS 

EXPENSES 
PER  UNIT 

VARIABLE 
EXPENSES 

FIXED 
EXPENSES 

TOTAL 
EXPENSES 

NET 
REVENUE 

$.10 

600,000 

$60,000 

$.03 

$18,000 

$50,000 

$68,000 

-$8,000 

.09 

800,000 

72,000 

.03 

24,000 

50,000 

74,000 

-    2,000 

.08 

1,200,000 

96,000 

.03 

36,000 

50,000 

86,000 

+  10,000 

.07 

1,800,000 

126,000 

.03 

64,000 

60,000 

104,000 

+  22,000 

.06 

2,500,000 

150,000 

.03 

75,000 

50,000 

125,000 

+  25,000 

.05 

3,500,000 

175,000 

.03 

105,000 

60,000 

155,000 

+  20,000 

.04 

6,500,000 

220,000 

.03 

165,000 

50,000 

215,000 

+    5,000 

Study  of  the  table  will  show  why,  in  the  case  assumed 
here,  the  monopoly  price  will  stand  at  six  cents.  Compe- 
tition, if  it  were  present,  would  keep  on  increasing  the 
supply  as  long  as  normal  profit  could  be  obtained.  In 
our  illustration  the  lowest  price  at  which  production  could 
be  carried  on  so  as  just  to  secure  a  profit  above  the  ex- 
penses of  production  would  be  four  cents  ;  and  four  cents 
would  therefore  be  the  competitive  price  or  the  price 
determined  by  the  balancing  of  marginal  utility  against 
marginal  cost  of  production.  But  since  the  monopolist 
has  such  control  over  the  production  that  he  can  control 
the  supply,  he  will  cut  off  production  at  2,500,000  units, 
at  which  point  the  marginal  utility,  and  hence  the  de- 
mand, will  fix  a  price  of  six  cents,  and  will  give  the  larg- 
est net  return,  125,000. 

The  student  may  be  interested  in  seeing  the  same  thing 
illustrated  by  a  diagram.  In  the  following  diagram,  we  take 
only  one  possible  case — that  in  which  the  monopolist  is  produc- 
ing a  commodity  the  making  of  which  falls  under  the  law  of 
increasing  returns. 


184        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 


In  the  diagram  the  curved  line  ab  is  taken  to  represent  the 
varying  cost  of  production,  and  is  hence  called  the  supply  curve: 
the  line  cd,  representing  the  state  of  demand,  is  similarly  called 
the  demand  curve.  The  line  ox  would  represent  the  price  under 
competitive  conditions.  The  perpendiculars  fh  and  il  represent 
the  prices  that  would  be  fixed  by  the  demand  if  the  monopolist 
were  to  limit  the  supply  to  eh  or  el  respectively.  The  lines  gh 
and  kl  would  represent  the  total  cost  per  unit  of  producing 
these  various  quantities.  The  parallelograms  ghqe  and  klne  rep- 
resent the  total  costs  of  the  different  quantities,  and  the  paral- 
lelograms fhpe  and  ilme  represent  the  total  returns  from  sales. 
Consequently  the  smaller  parallelograms  fgpq  and  ikmn,  which 
equal  the  parallelograms  representing  total  income,  minus  the 
parallelograms  representing  total  costs,  represent  the  net 
return.  If  the  character  of  the  two  curves  be  known,  it  is 
possible  to  determine  by  mathematical  formulae  where  the 
parallelogram  of  greatest  net  return  will  fall,  and  consequently 
what  will  be  the  monopoly  price.  It  will  be  well  for  the  stu- 
dent to  draw  a  similar  diagram  and  find  by  experimentation 
the  parallelogram  of  greatest  area,  and  from  this  the  monopoly 
supply  and  monopoly  price. 

The  Effect  of  a  Tax.  —  Our  numerical  illustration  and  our 
diagram  may  both  be  made  to  convey  a  lesson  regarding  the 
influence  of  taxation  upon  monopolies  and  monopoly  price. 
Fixed  expenses  have  no  influence  in  determining  the  price. 
If,  therefore,  a  fixed  tax,  say  of  $5000  a  year,  were  to  be 
laid  upon  this  monopoly,  it  would  not  result  in  an  increase 


MONOPOLIES  AND  MONOPOLY  VALUE  185 

of  price.  A  study  of  the  table  will  show  that  with  such  a 
tax  the  net  revenue  at  price  .08  would  be  $5000;  at  price  .07, 
$17,000 ;  at  price  .06,  $20,000 ;  at  price  .05,  $15,000 ;  at  price 
.04,  nothing.  Thus  price  .06  will  still  be  the  point  of  maximum 
net  revenue  and  hence  the  monopoly  price.  On  the  other 
hand  a  variable  tax,  for  instance  a  tax  of  one  cent  per  unit, 
would  result  in  this  case  in  raising  the  monopoly  price.  In 
our  illustration,  such  a  tax  would  make  the  net  revenue  at  the 
price  .08,  -  $2000 ;  at  the  price  .07,  $4000 ;  at  the  price  .06, 
nothing ;  at  the  price  .05,  —  $15,000.  Thus,  though  the  monop- 
oly would  find  its  profits  greatly  curtailed  by  such  a  tax,  con- 
sumers would  be  compelled  to  pay  one  cent  more  per  unit  for 
the  monopoly  product.  The  possible  advantage  which  society 
might  draw  from  the  tax  would  therefore  be  wholly  or  in  part 
offset  by  the  increased  cost  of  the  commodity.  Such  a  raising 
of  the  price  will  not  take  place,  however,  if  the  demand  at  the 
higher  price  is  not  sufficient  to  make  as  great  a  net  revenue  as 
at  the  lower  price.  We  may  conclude,  therefore,  that  fixed 
taxes,  or  taxes  on  the  net  revenue  of  a  monopoly,  cannot  be 
shifted  wholly  or  in  part  by  a  change  in  price;  while  taxes 
laid  in  proportion  to  the  amount  of  business,  since  they  con- 
tribute an  addition  to  the  variable  expenses,  may  be  wholly  or 
in  part  shifted  by  a  change  in  price. 

The  student  may  profitably  test  these  statements  regard- 
ing monopoly  by  hypothetical  cases  after  the  manner  of 
our  numerical  illustration,  and  by  drawings  similar  to  the 
diagram  used  to  illustrate  the  determination  of  monopoly 
price. 

A  Law  of  Monopoly  Price.  —  It  is  sometimes  said  that 
the  price  of  a  monopolized  good  depends  solely  upon  the 
will  of  the  monopolist.  In  the  strict  sense  of  the  phrase 
this  is  not  true.  As  our  explanation  has  shown,  the  mo- 
nopolist is  forced  by  economic  motives  to  establish  such  a 
price  as  will  give  the  maximum  net  revenue.  There  are 


186        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

certain  conditions  on  the  side  of  demand  which  therefore 
have  a  decisive  influence  in  determining  monopoly  price. 
We  may  group  the  most  important  of  these  in  a  general 
statement  which  may  properly  be  called  a  law  of  monopoly 
price:  The  greater  the  intensity  of  customary  use  of  the 
monopolized  commodity  or  service,  the  higher  the  general 
average  of  economic  well-being,  and  the  more  readily  wealth 
is  generally  expended,  the  higher  will  be  the  monopoly  price 
which  will  yield  the  largest  net  returns.  Thus  monopoly, 
without  any  effort  of  its  own,  shares  in  the  increasing 
wealth  of  a  country,  and  absorbs  a  considerable  part  of  it. 
It  is,  for  example,  among  other  influences,  the  larger 
wealth  and  the  greater  willingness  to  spend  freely  that 
makes  monopoly  more  profitable  in  the  United  States  than 
in  Germany  or  other  European  countries.  The  search  for 
other  illustrations  of  the  law  should  prove  an  interesting 
and  valuable  exercise  for  the  student. 

Public  Policy  regarding  Natural  Monopolies.  —  It  was 
long  ago  said  by  a  shrewd  English  engineer  that  where 
combination  is  possible,  competition  is  impossible.  Now 
combination  is  always  possible  in  the  case  of  natural 
monopolies  of  the  second  class.  (See  the  classification.) 
Indeed,  combination  in  such  businesses  is  inevitable.  If 
two  gas  companies  in  a  city,  each  with  a  capital  of  a  mill- 
ion dollars,  are  able  without  combining  to  make  10  per 
cent  profits,  they  will,  when  combined,  make  much  more 
than  10  per  cent.  The  force  drawing  them  together 
works  as  constantly,  if  not  as  uniformly,  as  the  attraction 
of  gravitation. 

The  testimony  of  experience  on  this  point  is  ample. 
There  is  never  any  competition  in  this  field.  There  is 
sometimes  "  war  "  to  settle  the  terms  of  combination,  and 


MONOPOLIES  AND  MONOPOLY  VALUE  187 

popular  language,  when  it  uses  the  word  "  war  "  in  this 
connection,  as  in  speaking  of  gas  wars,  etc.,  is  scientifi- 
cally correct.  What,  then,  should  be  the  policy  of  the 
government  in  dealing  with  these  industries  ?  Ought  we 
in  the  United  States  to  substitute  government  ownership 
and  management  of  such  monopolies  for  private  owner- 
ship and  management  ?  Some  of  these  monopolies  have 
been  in  public  hands  so  long  that  we  no  longer  think  of 
them  as  a  possible  field  for  private  enterprise.  Such,  for 
instance,  are  the  roads  and  streets,  the  post-office,  and,  in 
many  places,  the  canals.  As  to  the  others,  it  would  at 
least  be  well  to  limit  the  charters  and  to  make  such  a 
reservation  of  public  rights  as  will  later  permit  the  gov- 
ernment easily  and  readily  to  make  such  changes  as  the 
future  may  show  to  be  wise. 

Advantages  claimed  for  Public  Ownership.  —  The  princi- 
pal advantages  which  are  claimed  for  public  ownership  of 
such  monopolies  call  for  a  brief  discussion. 

1.  Increase  of  Public  Prosperity.  —  A  general  diffusion 
among  the  community  of  the  great  incomes  now  reaped 
by  the  private  monopolies  will  tend  to  prevent  an  undue 
concentration  of  wealth  while  at  the  same  time  promoting 
general  prosperity.  Most  of  the  enormous  fortunes  of 
our  country  have  sprung  directly  from  natural  monopolies 
in  private  hands.  It  should  be  noted  that  if  such  private 
monopolies  are  taken  over  by  the  government,  the  income 
from  them  may  be  diffused  in  either  of  two  ways.  Charges 
may  be  placed  so  low  that  the  price  will  simply  cover  cost 
without  allowing  for  profits,  —  the  method  pursued  by  our 
post-office,  and  by  the  English  telegraph  service ;  or  a  profit 
may  be  derived  from  the  industries,  and  this  used  to  lower 
taxes  or  to  benefit  the  people  in  other  ways. 


188        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

2.  Economy.  —  How  enormous  is  the  waste  of  war  in 
attempted  competition  in  the  field  of  natural  monopolies 
may  be  seen  on  every  side.     Indeed,  it  has  been  estimated 
that,  in  the  matter  of  railway  construction  and  operation 
in  the  United  States  during  the  past  fifty  years,  economic 
resources  have  been  wasted  which,  had  they  been  econom- 
ically applied,  would  have  been  sufficient  to  build  com- 
fortable homes  for  all  the  men,  women,  and  children  now 
in  the  country.     There  is,  therefore,  a  large  basis  of  reason 
in  the  claim  of  those  who  maintain  that  public  ownership 
of  such  monopolies  would  be  more  economical  than  the 
policy  of  private  ownership  and  management  has  been. 

When  services  of  a  monopolistic  nature  are  performed 
by  the  public,  great  economies  can  often  be  secured  by 
combining  various  services,  such  as  water,  gas,  and  elec- 
tric lighting.  Moreover,  a  better  management  is  likely  to 
result.  It  is  only  a  popular  superstition,  now  apparently 
passing  away,  that  private  enterprise  is  always  and  every- 
where superior  to  public  enterprise.  The  fact  of  the 
matter  is  that  each  should  be  superior  in  its  own  natural 
field. 

Nor  is  it  true  that  private  enterprise  always  excels  pub- 
lic enterprise  in  the  matter  of  initiating  improvements. 
The  English  government  has  introduced  in  the  telegraph 
service  improvements  which  our  private  telegraph  com- 
panies have  refused  to  adopt  on  account  of  the  expense. 
The  American  post-office  blazed  the  path  for  American 
express  companies  in  developing  the  money-order  busi- 
ness. The  English  Postal  Savings  Bank  set  a  pattern  for 
private  savings  banks  in  the  establishment  of  branches 
and  in  the  use  of  stamps  posted  on  small  cards  for  savings. 

3.  Purification  of  Politics.  —  Private  monopolies  must 


MONOPOLIES  AND  MONOPOLY  VALUE  189 

be  controlled  by  public  authority ;  but  control  means  in- 
terference with  private  business,  and  interference  begets 
corruption.  Not  a  year  passes  that  the  country  is  not 
shocked  by  the  disclosure  of  bribery  and  corruption  in 
connection  with  the  granting  or  extension  of  franchises 
or  in  some  one  of  the  many  ways  by  which  monopoly  in 
private  hands  seeks  to  secure  privileges,  to  free  itself  from 
duties,  or  to  escape  from  deserved  punishment.  A  lawyer 
prominently  identified  with  monopolistic  concerns  has 
declared  in  a  recent  public  address  that  the  "ante-natal 
tax  "  which  such  companies  are  obliged  to  pay,  —  that  is, 
the  bribery  necessary  for  securing  franchises,  —  consti- 
tutes a  regular  element  in  the  expenses  of  their  business. 
This  is  one  reason  why  our  city  governments  are  expen- 
sive. With  public  ownership  and  management  of  such 
monopolies,  public  interests  and  private  interests  are  iden- 
tified, and  the  best  citizens  can  offer  undivided  allegiance 
to  the  cause  of  good  government. 

4.  Will  overthrow  Injurious  Social  Monopolies.  —  It  is 
generally  agreed  to-day  that  many  social  monopolies  are 
advantageous,  but  there  are  others  which  are  distinctly 
injurious  to  the  best  interests  of  society.  Some  of  these 
injurious  social  monopolies  have  been  made  possible  by 
special  favors  received  from  the  natural  monopolies 
which  we  are  discussing;  as,  for  example,  by  receiving 
lower  freight  rates  than  competitors  could  secure.  If  all 
citizens  could  be  assured  just  and  equal  treatment  at  the 
hands  of  natural  monopolies,  the  limits  of  competition 
would  be  extended,  while  the  limits  of  monopoly  would  be 
restricted.  But  it  is  problematical  whether  such  just  and 
equal  treatment  can  be  hoped  for  while  natural  monopolies 
are  in  private  hands. 


190       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Jevons's  Criteria.  —  The  English  economist  Jevons,  as  a 
result  of  careful  study  of  government  management  of  mo- 
nopolies, reached  the  conclusion  that  there  are  certain  general 
principles  or  characteristics  by  which  we  may  judge  what 
monopolies  the  State  may  most  safely  undertake  to  manage. 
These  characteristics  may  be  briefly  summarized  as  follows: 
(1)  the  business  should  be  of  a  routine  nature,  as,  for  example, 
is  the  business  of  the  post-office;  (2)  the  business  should 
minister  to  a  permanent  and  widespread  public  need ;  (3)  the 
business  should  be  of  such  a  nature  as  to  be  constantly  subject 
to  public  criticism;  (4)  it  should  be  of  such  a  nature  as  to 
require  a  relatively  small  amount  of  capital  in  proportion  to 
the  amount  of  business  done ;  (5)  and  finally  it  should  be  of 
such  a  nature  that  the  technical  apparatus  required  for  its  suc- 
cessful management  may  be  easily  and  accurately  understood. 

As  regards  these  criteria,  it  may  be  observed  in  the  first 
place  that  they  afford  information  only  as  to  what  businesses 
the  State  is  most  likely  to  conduct  with  success — success  or 
failure  being  here  regarded  solely  from  the  standpoint  of  the 
private  business  manager.  In  other  words,  there  is  no  place 
in  this  statement  of  principles  for  the  consideration  that  the 
State  may  promote  the  social  welfare  by  managing  business 
at  what,  in  the  language  of  the  private  entrepreneur,  would  be 
called  a  loss.  Our  public  highways  are  almost  everywhere  a 
State-managed  monopoly,  created  and  maintained  by  taxation, 
not  by  fees  or  tolls.  Judged  solely  by  the  standard  of  private 
management,  they,  therefore,  do  not  constitute  a  successful 
business.  Yet  no  one  to-day  would  advocate  a  change  in  pub- 
lic policy  which  alone  could  make  their  management  "suc- 
cessful." 

In  the  second  place,  it  may  be  observed  that  although  we 
may  be  unwilling  permanently  to  restrict  the  State's  activity 
within  the  "ring  fence"  thus  set  up,  yet  we  may  well  use 
Jevons's  criteria  as  an  aid  in  determining  the  order  in  which 
the  State  should  assume  the  management  of  natural  monopo- 
lies. Furthermore,  it  will  appear  on  reflection  that  differ- 
ences in  the  degree  to  which  various  natural  monopolies  now 


MONOPOLIES  AND  MONOPOLY  VALUE  191 

conform  to  these  criteria  are  not  permanent,  but  are  ever  chang- 
ing. Thus  the  railway  business  is  becoming  more  and  more 
susceptible  to  routine  management;  the  need  for  its  service 
becomes  every  day  more  widespread ;  it  falls  more  and  more 
under  the  intelligent  criticism  of  the  public.  We  may,  there- 
fore, question  whether,  judged  even  from  the  standpoint  of 
private  business,  all  natural  monopolies  may  not  in  time  be 
successfully  managed  by  the  State. 

Conclusion.  —  Public  sentiment  in  favor  of  public  own- 
ership of  the  natural  monopolies  of  the  second  class  is 
rapidly  gathering  volume  and  force.  The  advantages 
which  might  result  from  such  a  policy  have  been  ex- 
plained. While  recognizing  these,  we  must  not  overlook 
the  enormous  difficulties  in  the  way  of  government 
ownership  and  control,  —  the  serious  problems  of  govern- 
mental organization  involved,  the  problem  of  improving 
the  civil  service,  of  securing  greater  honesty  and  efficiency 
in  the  public  business.  In  the  case  of  government  rail- 
ways would  arise  the  problem  of  rates  and  of  the  con- 
flicting demands  of  different  sections  and  industrial 
interests.  In  European  countries  these  difficulties  have 
proved  very  grave,  and  are  still  far  from  being  success- 
fully solved. 

Even  with  the  present  strong  tendency  toward  public 
ownership,  it  must  of  necessity  be  a  long  time  before  all 
natural  monopolies  will  pass  out  of  private  hands.  Mean- 
while, there  will  remain  the  ever  perplexing  question  of 
regulating  the  granting,  extension,  and  renewal  of  fran- 
chises, and  of  the  public  control  over  such  undertakings. 
No  question  in  economics  is  more  worthy  the  careful  con- 
sideration of  the  thoughtful  student  who  desires  to  equip 
himself  for  honest  and  intelligent  citizenship. 


192       ELEMENT AEY  PRINCIPLES  OF  ECONOMICS 

SUMMARY 

1.  The  essential  idea  in  monopoly  is  unity  of  action,  leading  to  con- 

trol  of  price  and  other  conditions. 

2.  Monopoly  value  differs  from  competitive  value  in  that  the  supply 

of  monopoly  goods  is  not  determined  by  cost  of  production. 

3.  Monopoly  price  is  the  price  of  maximum  net  revenue.     In  estab- 

lishing the  supply  and  the  price,  the  monopolist  disregards  fixed 
expenses ;  hence  a  fixed  tax  on  monopoly  cannot  be  shifted. 

4.  Monopoly  price  is  controlled  on  the  side  of  demand  by  the  wealth 

and  purchasing  habits  of  consumers. 

5.  It  is  claimed  in  favor  of  public  ownership  of  natural  monopolies 

that  the  policy  diffuses  prosperity,  is  economical,  purifies  poli- 
tics, and  overthrows  injurious  social  monopolies. 

QUESTIONS 

1.  Define  monopoly.    Name  and  define  the  different  classes  of  mo- 

nopoly.    Mention  some  monopolies  of  which  you  have  knowl- 
edge, and  explain  what  monopoly  advantages  they  enjoy. 

2.  Sum  up  in  a  brief  statement  the  peculiar  properties  of  natural 

monopolies  of  the  second  class.     Mention  some  monopolies  of 
this  class. 

3.  Show  by  a  numerical  illustration  and  by  diagram  how  monopoly 

price  is  determined.     Explain  the  difference  between  monopoly 
price  and  competitive  price. 

4.  Explain  differences  in  the  effect  of  different  methods  of  taxation 

of  monopolies. 

5.  What  advantages  are  claimed  for  public  ownership  of  natural 

monopolies?     What  dangers  are  involved  in  such  a  policy? 

6.  State  the  law  of  monopoly  price. 

LITERATURE 

Baker,  C.  W. :  Monopolies  and  the  People,  Part  II. 
Baker,  M.  N. :  Municipal  Engineering  and  Sanitation. 
Bemis,  E.  W. :  Municipal  Monopolies,  pp.  660-680. 
Bullock,  C.  J. :  Introduction  to  the  Study  of  Economics,  Ch.  XL 
Ely,  R.  T. :  Monopolies  and  Trusts,  Ch.  Ill,  pp.  102-104,  also  Ch.  VI, 
pp.  229-231. 


MONOPOLIES  AND  MONOPOLY  VALUE  193 

Hobson,  J.  A.:  Evolution  of  Modern  Capitalism,  pp.  156-160. 
Jenks,  J.  W. :  The  Trust  Problem,  pp.  20,  43,  53,  98. 
Report  of  the  Chicago  Conference  on  Trusts. 

Report  of  the  United  States  Industrial  Commission,  Vols.  I  and  II. 
Shaw,  Albert :  Municipal  Government  in  Great  Britain;  also  Municipal 
Government  in  Continental  Europe,  Ch.  VI. 


CHAPTER  IV 
MONEY 

HAVING  discussed  at  length  the  fundamental  principles 
on  which  exchange  and  value  rest,  we  pass  naturally  to 
consider  the  nature  of  the  complex  mechanism  by  which 
exchange  is  effected.  At  the  very  centre  of  this  mecha- 
nism stands  money,  the  medium  of  exchange.  We  have 
already  in  our  historical  study  explained  how  from  the 
custom  of  making  gifts  men  passed  to  regular  exchange 
by  barter,  and  how  from  barter  everywhere  grew  up  the 
regular  use  of  some  one  thing  or  some  few  things  as 
means  of  making  exchanges.  With  the  handicraft  stage 
men  had  come  to  use  the  precious  metals  for  this  purpose, 
and  money,  in  the  modern  sense  of  the  word,  thus  became 
a  regular  institution. 

The  Definition  of  Money.  —  But  what  is  money  ?  When 
we  come  to  define  the  word,  we  find  that  usage  is  by  no 
means  uniform.  It  is  often  convenient  to  use  the  popular 
meaning  of  the  term,  according  to  which  money  is  any- 
thing that  passes  freely  from  hand  to  hand,  as  a  medium 
of  exchange,  and  is  generally  received  in  final  discharge 
of  debts.  But  there  is  a  narrower  conception  based  upon 
the  functions  which  money  fulfils  in  the  modern  economy. 
In  the  first  place,  (1)  we  find  that  money  everywhere 
serves  as  a  medium  of  exchange.  This,  the  first  function 
to  be  developed,  is  everywhere  the  principal  function  of 
all  kinds  of  money.  Our  present  civilization  would  be 

194 


MONET  195 

impossible  without  money  as  a  medium  of  exchange. 
Without  such  a  medium,  a  man  with  a  horse  who  wanted 
a  coat  would  be  obliged  to  hunt  for  a  tailor  who  wanted  a 
horse,  and  even  after  finding  him,  he  might  be  unable  to 
effect  an  exchange  owing  to  the  inequality  in  values  of 
the  things  to  be  exchanged.  In  the  second  place,  (2)  we 
find  that  money  serves  directly  and  immediately  as  a 
measure  of  values.  It  is  frequently  said  that  money  is  a 
"  denominator  "  of  values,  and  usually  this  means  the  same 
thing.  This  second  function  springs  naturally  from  the 
first,  for  as  men  make  exchanges  commonly  for  some  one 
commodity,  that  commodity  comes  to  serve  as  a  stand- 
ard by  which  the  exchange  values  of  all  exchangeable 
things  are  measured.  That  this  function  may  be  best  ful- 
filled there  is  needed  a  definite,  concrete,  money  unit  like 
our  gold  dollar,  which  consists  of  25.8  grains  of  gold 
and  silver,  in  the  proportion  of  9  to  1.  When,  having 
such  a  unit,  we  say  that  a  commodity  is  worth  $10,  we 
mean  that  the  exchange  value  of  the  commodity,  or  its 
power  of  commanding  other  commodities  in  exchange,  is 
ten  times  that  of  the  monetary  unit.  It  sometimes  hap- 
pens that  men  name  values,  not  in  terms  of  the  money 
actually  used,  but  in  terms  of  some  money  which  has  been 
in  earlier  days  the  regular  medium  of  exchange.  Thus, 
throughout  our  Eastern  States  one  often  hears  values 
reckoned  in  shillings,  though  it  is  long  since  there  was 
any  money  coined  of  that  denomination.  Such  money  is 
called  "money  of  account."  In  the  third  place,  (3)  money 
serves  the  function  of  a  standard  of  deferred  payments. 
If  I  wish  to  sell  commodities  or  services  to-day  to  one  who 
can  pay  me  only  at  some  future  time,  it  is  of  the  utmost 
importance  that  we  should  have  some  agreed  standard 


196       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

according  to  which  the  payment  should  be  made.  This 
function  of  money  is  usually  facilitated  by  having  a  legal 
tender  quality  attached  to  it,  though  such  a  legal  tender 
quality  is  by  no  means  necessary  to  the  fulfilling  of  the 
function.  By  the  use  of  the  term  "legal  tender"  we 
mean  simply  that  the  legislature  has  declared  that  any 
one  having  a  debt  to  pay  may  discharge  his  debt  through 
the  "tender"  or  offer  of  the  prescribed  commodity,  and 
that  in  case  of  a  suit  at  law  the  courts  will  declare  such 
a  tender  to  have  been  a  legal  one.  Money  has  a  fourth 
function,  (4)  that  of  serving  as  a  store  or  receptacle  of 
value,  so  that  the  value  may  be  transferred  from  place  to 
place  and  from  time  to  time.  Thus  Roman  gold  money, 
preserved  for  two  thousand  years,  has  brought  its  value 
down  to  our  own  time ;  and  gold  money  taken  across  the 
Atlantic  bears  with  it  its  stored-up  value. 

And  now  we  may  sum  up  what  has  gone  before  in  a 
formal  definition  of  money  in  the  narrower  sense  of  the 
word.  Money  is  any  commodity  that  serves  as  a  medium  of 
exchange,  as  a  measure  of  values,  as  a  standard  of  deferred 
payments,  and  as  a  store  of  value.  The  meaning  given 
to  the  word  in  the  following  pages  will  in  each  case  be 
evident  from  the  context. 

Qualities  Desirable  in  the  Material  of  our  Money.  — 
Many  things  have  been  used  as  money  at  one  time  or 
another  in  the  world's  history  :  cattle  nearly  everywhere  ; 
furs,  especially  in  the  Northern  countries  ;  oil ;  wampum, 
among  the  early  New  Englanders  ;  tea,  at  Russian  fairs ; 
tobacco,  as  in  Maryland  and  Virginia;  all  the  baser  metals; 
and  the  two  precious  metals,  gold  and  silver.  Of  all  the 
metals,  gold  and  silver  have  in  civilized  nations  been  found 
best  adapted  to  money  uses.  Of  the  two,  gold  has  shown 


MONET  197 

a  special  fitness,  and  now  bids  fair  to  survive  as  the  money 
metal  of  the  future.  Nevertheless,  silver  is  still  every- 
where used  in  large  quantities,  though  among  advanced 
nations  it  generally  occupies  a  subordinate  position.  The 
qualities  which  have  given  gold  and  silver  their  predomi- 
nance for  use  as  money  are  precisely  those  qualities  which 
we  may  readily  recognize  as  the  qualities  that  all  money 
should  have.  In  the  first  place,  they  are  very  generally 
desired,  independently  of  their  money  use,  since  they  can 
be  used  in  the  arts  as  well  as  for  ornament.  This  fact 
gives  them  security  and  stability  of  value.  Whenever 
their  value  begins  to  fall,  the  demand  for  them  for  other 
uses  than  that  of  money  increases  and  so  prevents  the  fall 
in  value  from  being  as  great  as  it  otherwise  would  be. 
Moreover,  this  stability  of  value  is  further  secured  by  the 
fact  that  the  annual  production  of  these  metals  bears  so 
small  a  proportion  to  the  entire  amount  in  existence. 
Gold  and  silver  are  almost  imperishable.  The  gold  in 
coin  and  bars  and  the  silver  in  coin,  now  existing,  are 
estimated  to  be  worth  between  eight  and  nine  thousand 
millions  of  dollars.  Compared  with  this  amount,  even 
the  present  large  yearly  production  of  about  1400,000,000 
is  small.  Changes  in  the  value  of  gold,  therefore,  so  far 
as  these  changes  are  due  to  conditions  affecting  the  sup- 
ply, proceed  very  slowly  and  gradually.  The  high  specific 
value  of  the  precious  metals  —  that  is,  their  high  value  in 
proportion  to  their  weight  and  bulk  —  adapts  them  to  use 
for  money  by  making  them  a  convenient  store  or  recep- 
tacle of  value.  Because  of  their  high  specific  value,  the 
cost  of  transporting  them  from  place  to  place  is  slight, 
and  therefore  their  value  varies  little  from  place  to  place. 
Their  durability  and  indestructibility  are  also  valuable  quali- 


198        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

ties,  while  their  extreme  divisibility  without  loss  of  value 
makes  it  possible  to  secure  a  medium  of  exchange  of  any 
desired  value,  however  small.  Their  malleability  renders 
coinage  easy,  as  does  also  their  homogeneity,  by  virtue  of 
which  one  ounce  or  pound  is  always  just  as  valuable  as 
any  other  ounce  or  pound.  Moreover,  the  metals  and  the 
coins  made  from  them  are  readily  recognizable  on  account 
of  their  peculiar  ring  and  their  other  attributes,  and  are 
therefore  well  adapted  to  popular  use. 

Let  us  now  sum  up  these  qualities  which  are  found 
especially  desirable  in  money:  they  are  (1)  commodity 
value,  (2)  high  specific  value,  (3)  stability  of  value,  (4)  uni- 
formity of  value,  (5)  cognizability,  (6)  durability,  (7)  porta- 
bility, (8)  malleability,  (9)  homogeneity. 

Coinage.  —  When  the  metals  first  came  to  be  used  as  a 
medium  of  exchange,  they  passed  from  hand  to  hand  in 
their  rough  state,  as  "  dust,"  or  in  nuggets,  and  the  test- 
ing of  amount  and  fineness  was  left  to  the  parties  to  the 
exchange.  In  course  of  time,  private  individuals  of  note 
occasionally  stamped  or  otherwise  certified  to  the  weight 
or  fineness  or  both,  a  custom  which  still  obtains  in  some 
parts  of  the  world.  Gradually,  governments  took  over 
the  work  of  providing  an  authorized  currency,  and  systems 
of  regular  coinage  were  developed.  In  attempting  to  im- 
prove coins,  governments  have  sought  first  of  all  to  pre- 
vent counterfeiting  by  making  the  coins  of  regular  and 
uniform  sizes,  and  by  various  devices,  such  as  elaborate 
designs  upon  the  face,  milled  edges,  etc.  In  all  this,  gov- 
ernments, though  they  do  not  give  the  original  value  to 
the  money,  do  increase  the  value,  by  the  superior  ex- 
changeability which  their  certification  confers  upon  it. 

When  the  government  at   its  mint  coins  for  private 


MONEY  199 

persons  any  metal  that  they  may  bring  to  it,  the  coinage  is 
said  to  be  on  private  account  or  free  coinage.  The  expres- 
sion "  free  coinage,"  therefore,  does  not  have  reference  to 
the  cost  of  coining.  If  the  government  coins  for  private 
persons  without  charge,  coinage  is  not  only  free  but  also 
gratuitous.  Any  charge  by  the  mint  for  coinage  is  called 
mintage.  If  the  charge  is  just  sufficient  to  reimburse  the 
government  for  the  expense  of  the  work,  it  is  called  by 
the  French  name  brassage ;  anything  in  excess  of  such  a 
charge  is  then  called  seigniorage.  When  the  government 
buys  the  metal  in  the  market  at  the  market  price  and 
coins  it,  the  coinage  is  said  to  be  on  government  account. 
If  the  face  value  of  the  money  thus  coined  exceeds  the 
market  value  of  the  metal  by  more  than  the  expense  of 
coinage,  the  difference  constitutes  another  form  of  seign- 
iorage. Most  industrial  nations  to-day  coin  gold  on 
private  account  and  silver  on  public  or  government  ac- 
count ;  in  other  words,  under  such  governments  there  is 
free  coinage  of  gold,  but  not  of  silver. 

Governments  and  Money.  —  From  the  fact  that  govern- 
ments regulate  the  coinage  of  money  has  grown  up  in  the 
minds  of  many  people  the  erroneous  idea  that  governments 
make  money.  As  we  have  seen,  all  the  functions  that 
make  money  what  it  is  can  be  fulfilled  and  have  been 
fulfilled  without  the  participation  of  government  at  all. 
Governments,  therefore,  do  not  make  money.  But  by 
careful  coinage  to  prevent  counterfeiting,  by  stringent 
laws  against  counterfeiting,  and  by  conferring  a  legal 
tender  power  upon  the  medium  of  exchange,  governments 
have  done  much  and  can  do  much  to  increase  the  currency 
or  exchangeability  of  money,  and  hence  may  give  to  a  cer- 
tain volume  of  money  a  greatly  increased  value.  Gold 


200        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

and  silver  would  have  a  considerable  value  to-day  for  use 
in  the  arts  and  for  ornament,  even  if  they  were  not  used 
as  money  at  all.  They  would  have  a  very  high  value  as 
commodities  and  as  money,  even  if  the  government  should 
leave  the  work  of  coinage  and  the  work  of  debt  enforce- 
ment to  private  honor.  But  it  cannot  be  doubted  that 
gold  and  silver  to-day  have  a  higher  value  than  they  would 
have  in  either  of  the  two  cases  just  assumed. 

Prices  and  the  Value  of  Money.  —  It  is  clear,  from  what 
has  been  said  concerning  money  as  a  measure  of  value, 
that  a  change  in  the  value  of  the  money  unit  means  a 
change  in  the  general  prices  of  other  commodities.  To 
say  that  a  dollar  has  become  cheaper  is  the  same  as  saying 
that  prices  have  risen  ;  i.e.,  it  takes  more  dollars  to  buy 
the  same  commodity.  Again,  any  cause  that  lowers  prices 
thereby  raises  the  value  of  money.  In  brief,  prices  and 
the  value  of  money  vary  inversely. 

Prices  and  the  Quantity  of  Money. — When  prices  are 
high,  it  is  evident  that  a  larger  volume  of  the  medium  of 
exchange  is  needed,  the  rapidity  of  circulation  remaining 
the  same1,  than  when  prices  are  low.  When  coats  are 
110  apiece,  it  takes  a  greater  quantity  of  the  medium  of 
exchange  to  buy  them  than  when  they  are  only  $5  apiece. 
This  is  a  fact  about  which  there  is  no  dispute.  But  it  is 
a  distinct  and  difficult  question  whether  an  increased 
supply  of  money  can  itself  make  prices  high,  or  whether 
it  is  the  high  prices  that  call  forth  the  increased  supply 
of  money. 

The  Value  of  Money.  —  One  of  the  most  difficult  and  most 
disputed  problems  in  regard  to  money  is  this  of  the  determina- 
tion of  its  value.  One  answer  to  the  problem,  known  as  the 
"  quantity  theory,"  has  been  generally  accepted  for  over  a  cen- 


MONET  201 

tury ;  but  within  the  last  few  years  this  theory  has  been  vig- 
orously combated  and  does  not  now  receive  the  general  assent 
to  its  validity  that  was  formerly  granted  it. 

The  Quantity  Theory.  —  It  is  not  easy  to  state  the  theory 
briefly  and  at  the  same  time  accurately,  but  in  a  general  way 
it  runs  as  follows:  The  value  of  money,  and  therefore  gen- 
eral prices,  will  vary  according  to  the  proportion  between  the 
demand  for  money  and  the  supply  of  it.  By  the  demand  for 
money  is  meant  the  number  of  exchanges  to  be  effected  by 
the  use  of  money.  When  trade  is  very  brisk,  a  great  many 
commodities  will  be  produced  and  exchanged,  and  to  effect  the 
exchanges  society  will  need  a  great  deal  of  money ;  in  other 
words,  the  demand  for  money  will  be  great.  By  the  supply  of 
money  is  meant  the  quantity  of  money  taken  in  connection  with 
the  rapidity  of  its  circulation.  Thus,  if  money  circulates  more 
rapidly  on  the  average  in  one  country  than  in  another,  a  given 
quantity  of  money  in  the  first  country  will  result  in  a  greater 
supply  of  money  than  in  the  second.  Now,  according  to  the 
theory,  if  the  supply  of  money  remains  the  same  during  any 
period  of  time,  while  the  demand  for  money  increases  on 
account  of  the  increased  volume  of  business,  a  given  quantity 
of  money  will  exchange  for  a  greater  quantity  of  other  goods 
than  before.  In  other  words,  the  value  of  money  will  have 
risen,  and,  what  is  the  same  thing,  the  value  of  commodities, 
measured  in  terms  of  money,  will  have  fallen.  Conversely, 
if  the  general  state  of  business  during  any  period  of  time 
remains  the  same,  while  the  supply  of  money  increases  either 
through  an  increase  in  quantity  or  through  an  increase  in  the 
rapidity  of  circulation,  the  value  of  money  will  fall  and  gen- 
eral prices  will  rise.  To  go  a  step  farther,  we  may  say  that  if 
the  demand  for  money  at  any  time  increases  faster  than  the 
supply,  the  result  will  be  a  rise  in  the  value  of  money  and  a 
corresponding  fall  in  general  prices;  while  if  the  supply  of 
money  increases  faster  than  the  demand,  there  will  be  a  fall  in 
the  value  of  money  and  a  corresponding  rise  in  general  prices. 

The  Value  of  Money  and  the  Cost  of  Production.  — Finally, 
it  should  be  added,  the  theory  holds  that  in  the  long  run,  the 


202        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

value  of  money  is  influenced  by  the  cost  of  production  of  the 
precious  metals.  Dear  money  and  cheap  goods,  it  is  said,  will 
make  mining  cheaper  and  more  profitable,  and  hence  will  tend 
to  increase  the  output  of  the  precious  metals.  Conversely, 
cheap  money  and  dear  goods  will  lessen  the  incentive  to  min- 
ing, and  hence  will  tend  to  lessen  the  supply  of  money  metal 
or  diminish  its  rate  of  increase. 

Qualifications.  —  Certain  qualifications  of  the  theory  call 
for  special  comment.  Not  all  transactions  are  effected  by  the 
agency  of  money.  Barter  still  plays  a  small  part  in  the  work 
of  exchange,  and  if  the  amount  of.  money  should  become  very 
small,  barter  would  increase.  Credit  is  coming  to  play  a  larger 
and  larger  part  in  exchanges,  and  must,  therefore,  be  taken  into 
account  in  estimating  the  demand  for  money.  When  these  facts 
are  taken  into  account,  and  when  it  is  further  remembered  that 
the  theory  itself  involves  so  many  considerations  bearing  not 
only  upon  the  quantity  of  money  and  the  rapidity  of  its  circu- 
lation, but  also  upon  the  utility  of  other  goods  and  the  cost  of 
their  production,  it  will  be  seen  that  any  conclusions  based 
upon  the  theory  must  be  accepted  with  the  greatest  caution, 
if  at  all. 

General  Prices  and  Prices  of  Individual  Commodities. — 
It  is  to  be  particularly  noticed  that  we  have  spoken  of  general 
prices.  There  is  nothing  in  the  theory  that  would  be  incon- 
sistent with  an  increased  demand  for  money  coinciding  with 
a  rise  in  the  value  of  some  other  commodity  or  group  of  com- 
modities. It  is  always  happening  that  while  general  prices 
are  rising  or  falling,  the  value  of  some  commodities  is  moving 
in  the  opposite  direction.  Even  though  the  quantity  of  money 
were  very  greatly  and  very  rapidly  decreased,  the  difficulties 
of  producing  some  other  commodity  might  increase  more  than 
in  proportion,  with  the  result  that  the  value  of  that  commodity, 
measured  in  terms  of  money,  would  rise  instead  of  falling. 

Paper  Money.  —  Hitherto  we  have  been  speaking  espe- 
cially of  coin  money.  Another  form  of  money  which  has 
been  used  extensively  in  modern  times  is  paper  money, 


MONET  203 

which  usually  consists  of  written  promises  to  pay  on 
demand,  given  by  banks  or  by  the  government.  People 
take  these  promises  to  pay  and  use  them  as  money,  because 
they  believe  that  the  promise  will  be  kept ;  or  because  they 
think  that  others  will  accept  them  without  question ;  or 
because  they  know  that  the  notes,  having  been  made  legal 
tender,  must  be  accepted  for  debt  unless  otherwise  ex- 
pressly stipulated  by  contract ;  or  because,  as  is  the  case 
with  most  kinds  of  paper  money,  such  bills  or  notes  are 
receivable  for  taxes.  Where  confidence  in  paper  money 
is  complete,  such  money  is  often  preferred  to  metal  money, 
because  more  convenient. 

If  the  student  will  read  carefully  what  is  engraved  on 
the  different  kinds  of  paper  money  circulating  in  the 
United  States,  he  will  readily  learn  its  nature,  and  will 
discover  that  it  is  of  two  general  kinds  :  notes  of  national 
banks,  and  notes  of  the  Federal  government.  The  notes 
issued  by  the  government  are  of  many  different  kinds. 
Gold  certificates  and  silver  certificates  are  simply  certifi- 
cates entitling  the  holder  to  demand  and  receive  from 
the  government  the  number  of  dollars,  in  gold  or  silver, 
printed  on  the  face  of  the  notes.  The  government  always 
keeps  the  amount  called  for  by  these  certificates,  dollar 
for  dollar,  in  its  vaults.  The  so-called  "greenbacks,"  or 
United  States  Notes,  on  the  other  hand,  and  the  so-called 
Sherman  Notes,  or  Treasury  Notes  of  1890,  are  simply 
government  promises  to  pay  on  demand  the  amounts 
named  on  the  face  of  the  notes.  These  are  not  backed 
up  dollar  for  dollar  by  hard  money  in  the  Treasury,  but 
are  protected  by  a  reserve  fund  which  is  supposed  to  be 
sufficient  to  meet  all  demands  as  they  are  made. 

Inflation  and  Contraction.  —  When  the  supply  of  money 


204       ELEMENTAEY  PRINCIPLES   OF  ECONOMICS 

is  increased  to  such  an  extent  that  prices  are  generally 
affected,  there  is  said  to  be  an  inflation  of  the  currency. 
On  the  other  hand,  when  the  supply  of  money,  relatively 
to  the  demand,  decreases  to  such  an  extent  that  prices  in 
general  fall,  there  is  said  to  be  a  contraction  of  the  cur- 
rency. Inflation  and  contraction  of  metal  money  have 
both  occurred  on  a  large  scale  in  the  world's  history,  and 
there  is  nothing  to  prevent  a  recurrence  of  the  same 
trouble  in  the  future.  Such  contraction  or  inflation  is 
said  to  be  natural,  because  it  depends  upon  the  natural 
conditions  surrounding  the  supply  of  the  precious  metals. 
But  the  government  may  also  create  the  evil  of  inflation 
by  issuing  paper  money  in  excessive  amounts.  In  such  a 
case  the  inflation  is  artificial. 

Inflation  of  the  currency,  whether  natural  or  artificial, 
works  an  injury  to  large  classes  of  persons.  All  persons  in 
receipt  of  fixed  and  slowly  changing  money  incomes  and  all 
persons  having  money  due  them  on  long  time  contracts, 
find  their  purchasing  power  lessened  beyond  what  they 
could  reasonably  have  expected.  In  a  word,  we  may  say 
that  inflation  works  an  undeserved  injury  to  the  creditor 
class  in  the  community.  On  the  other  hand,  contraction 
works  a  similar  injury  to  the  debtor  class.  During  periods 
of  falling  prices,  due  to  contraction,  men  who  have  entered 
into  business  engagements  on  borrowed  capital  find  that 
the  goods  which  they  have  to  sell,  and  on  the  profits  from 
which  they  must  depend  for  the  repayment  of  the  bor- 
rowed capital,  are  constantly  falling  in  price,  so  that  if 
they  return  the  amount  of  their  debt  in  money  they  will 
really  be  repaying  a  much  greater  amount  of  general  pur- 
chasing power. 

If  inflation  is  harmful  to  creditors,  and  contraction  is 


MONEY  205 

harmful  to  debtors,  it  is  equally  true  that  inflation  confers 
an  advantage  upon  debtors  and  that  contraction  confers  a 
similar  advantage  upon  creditors.  Such  being  the  case,  it 
is  perhaps  not  to  be  wondered  at  that  there  should  at  times 
be  many  who  ask  the  intervention  of  government  to  change 
the  level  of  prices  by  a  change  in  the  amount  of  money. 
If  artificial  contraction  could  be  produced  as  easily  as  arti- 
ficial inflation,  it  is  possible  that  the  creditor  classes  in  the 
community  would  occasionally  appeal  to  the  government 
for  the  advantage  which  would  accrue  to  them  from  such 
a  policy.  As  it  is,  such  appeals  come  rather  from  the 
debtor  class. 

The  Evils  of  Artificial  Inflation.  —  Some  of  the  dangers 
resulting  from  artificial  inflation  call  for  further  comment. 
It  is  easy  to  set  printing-presses  to  work,  and  to  issue 
money  in  unlimited  amounts.  This  is  apparently  much 
easier  than  taxation  as  a  means  of  paying  the  expenses  of 
the  government,  and  the  temptation  to  pursue  such  a  pol- 
icy has  often  promoted  waste  and  extravagant  expendi- 
ture. Moreover,  only  a  limited  amount  of  such  money 
can  be  kept  in  circulation  at  its  nominal  or  par  value. 
The  depreciation  which  results  from  issuing  paper  money 
beyond  this  limit  produces  great  inconvenience  and  suf- 
fering, since,  according  to  a  law  known  as  Gresham's  Law, 
inferior  money  regularly  drives  better  money  out  of  circula- 
tion. As  a  result,  prices  rise.  The  rise  of  prices  dimin- 
ishes the  value  of  all  fixed  incomes,  of  interest  payments 
on  all  debts,  and  of  wages.  Inflation  of  this  sort  is  also 
a  great  inconvenience  in  international  trade,  because  one 
nation  does  not  recognize  the  legal  tender  quality  of 
another  nation's  paper  money,  and  foreigners  lose  faith  in 
a  paper  money  which  is  not  kept  at  a  par  with  the  precious 


206        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

metals.  Governments  can  keep  their  paper  money  at 
par  by  redeeming  it  in  gold  whenever  gold  is  demanded. 
In  such  cases  paper  money  is  said  to  be  redeemable.  Re- 
deemable paper  money  cannot  be  overissued,  and  since  it 
has  many  clear  advantages  over  metal  money,  it  is  in 
many  respects  good  money.  Irredeemable  paper  money 
is  irredeemably  bad.  Under  these  circumstances  it  is  evi- 
dent that  governments  should  issue  no  paper  money  at  all 
unless  they  are  sure  that  such  issues  will  not  lead  to  dis- 
honest inflation. 

CHANGES  IN  THE  AMOUNT  OF  MONEY  :   BIMETALLISM 

The  Amount  of  Money  Needed.  — The  question  has  often 
been  asked,  How  much  money  does  a  country  need  ?  And 
the  answer  has  sometimes  been  given  :  "  It  makes  no  dif- 
ference how  much  money  there  is.  If  the  supply  is  abun- 
dant, prices  will  be  high;  if  the  supply  is  small,  prices 
will  be  low  and  the  same  amount  of  money  will  go  farther, 
A  little  money  will  do  the  work  as  well  as  a  large  sup- 
ply." It  is  true  that  there  is  a  relation  between  the 
supply  of  money  and  its  value,  although  this  relation  is  by 
no  means  simple,  but  rather  extremely  intricate  ;  and  it  is 
true  that  other  things  being  equal,  large  supply  means 
small  value  per  piece,  and  small  supply  large  value ;  but 
the  conclusion  which  was  drawn  from  these  facts  in  the 
above  answer  does  not  follow  from  the  facts  themselves. 
When  the  amount  of  money  is  small,  barter  is  extensively 
practised,  with  resulting  loss  and  inconvenience  to  trade. 
There  should  certainly  be  a  sufficient  stock  of  money  to 
effect  all  ordinary  transactions  of  life  for  which  credit  in- 
struments are  not  readily  available.  Now,  one  of  the  most 


MONET  207 

common  business  transactions  is  the  payment  of  wages, 
and  money  should  therefore  exist  in  such  quantities  that 
it  will  not  be  too  valuable  to  use  for  that  purpose.  In 
other  words,  the  supply  of  money  should  be  great  enough 
to  make  the  value  of  a  coin  of  convenient  size  not  greater 
than  the  value  of  the  day's  wages  of  an  unskilled  laborer. 
It  is  even  desirable  that  money  should  be  still  cheaper,  so 
that  the  earnings  of  such  a  day's  labor  may  be  divided 
into  parts.  It  is  not,  however,  necessary  that  money 
should  be  cheap  enough  to  enable  us  to  make  our  small- 
est purchases  with  full  legal  tender  money,  since  in  addi- 
tion to  full  legal  tender  money,  all  countries  have  subsidiary 
coins  like  our  fractional  parts  of  a  dollar,  which  are  legal 
tender  only  for  small  payments.  These  subsidiary  coins 
contain  less  than  the  proportionate  amount  of  pure  metal. 
In  the  United  States,  the  subsidiary  coins  are  the  half- 
dollar,  quarter-dollar,  and  the  ten-cent  pieces.  These  are 
legal  tender  to  an  amount  not  exceeding  $10  in  any  one 
payment.  Besides  the  subsidiary  coinage  there  is  the 
so-called  minor  coinage,  which  in  the  United  States  con- 
sists of  nickels  and  coppers,  and  is  legal  tender  in  pay- 
ments up  to  twenty-five  cents. 

Fluctuations  in  the  Volume  of  Money.  —  The  grounds 
just  given  for  the  need  of  a  certain  amount  of  money  are 
not  the  only  considerations  of  importance  in  determining 
how  much  a  country  needs.  Provided  the  above  require- 
ment has  been  satisfied,  it  may  make  little  difference 
whether  the  amount  of  money  at  any  one  time  be  large 
or  small,  but  it  does  make  a  great  deal  of  difference,  as 
we  have  shown  in  discussing  inflation  and  contraction, 
whether  the  amount  of  money  remains  the  same  or  in- 
creases or  decreases.  It  is  not  the  "  much  or  little,"  but 


208        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

the  "  more  or  less  "  that  counts.  Obligations  have  been 
made  in  the  past  which  must  be  met  in  the  present  or 
future.  Now,  to  decrease  the  amount  of  money,  other 
things  remaining  the  same,  raises  the  value  of  every  debt 
and  adds  to  the  burden  of  every  debtor.  It  increases  the 
value  of  notes,  mortgages,  and  railway  bonds,  and  of  local, 
state,  and  Federal  bonds  as  well.  It  enriches  the  few  at 
the  expense  of  the  many. 

We  must  not  forget,  however,  that  the  quantity  of 
money  is  by  no  means  the  only  factor  in  determining  the 
value  of  the  money.  So  many  forces  are  present  in  de- 
termining general  prices  that  any  conclusion  based  solely 
upon  the  relation  between  the  quantity  of  money  and  its 
value  must  be  accepted  with  the  utmost  caution.  Thus 
in  our  day  credit  is  becoming  a  more  and  more  important 
instrument  of  exchange,  and  we  must  remember  that  what- 
ever impairs  confidence  so  shrinks  the  volume  of  credit 
and  credit  instruments  that  it  produces  a  stringency  in 
the  money  market,  and  thereby  raises  the  value  of  money. 

Bimetallism.  —  Our  discussion  of  the  amount  of  money 
needed  by  a  country  naturally  brings  us  to  the  much- 
debated  question  of  bimetallism.  To  institute  a  system  of 
bimetallism,  three  things  are  necessary :  two  metals,  free 
coinage  of  both  at  a  fixed  ratio,  and  both  made  legal  ten- 
der. Silver  and  gold  have  both  been  generally  used  as 
money,  the  government  determining  at  what  ratio  the 
two  should  be  coined.  A  ratio  that  has  been  quite  gen- 
erally used  is  15|  to  1,  which  means  that  in  full  legal 
tender  coins  under  such  a  system,  one  ounce  of  gold  is 
treated  as  equal  in  debt-paying  power  to  15|  ounces  of 
silver.  This  has  been  the  general  European  ratio,  while 
that  of  the  United  States,  established  in  our  first  coinage 


MONET  209 

act  of  1792  at  15  to  1,  was  changed  to  16.002  to  1  and 
then  to  15.988  to  1  by  Acts  of  1834  and  1837. 

The  Latin  Monetary  Union.  —  The  European  ratio  was 
maintained  with  free  coinage  of  both  metals  for  about 
seventy  years  during  the  nineteenth  century  by  the 
action,  first  of  France,  and  then  of  a  combination  of 
countries,  called  the  Latin  Monetary  Union,  in  which 
France,  Belgium,  Switzerland,  and  Italy  were  most 
prominent.  Under  their  system,  every  one  who  had 
gold  or  silver  in  any  form  could  have  it  changed  to 
money  at  the  established  ratio  of  coinage. 

Demonetization.  — About  1873,  however,  Germany,  which 
had  before  given  free  coinage  only  to  silver,  decided  to 
change  to  a  gold  basis,  and  threw  upon  the  markets  of  the 
world  an  immense  amount  of  silver  at  the  same  time  that 
she  increased  the  demand  for  gold.  In  the  same  year,  our 
own  country  dropped  the  silver  dollar  from  the  list  of 
coins  to  be  struck  at  the  mint,  thus  putting  us  on  the  basis 
of  gold  monometallism,  although,  as  a  matter  of  fact,  no 
silver  dollars  had  been  coined  for  years.  Because  of 
the  rapid  decline  in  the  value  of  silver,  the  Latin  Union 
also  soon  after  suspended  its  free  coinage.  To  add  to  the 
confusion,  large  discoveries  of  silver  at  about  the  same 
time  brought  about  a  great  and  rapid  increase  of  the  sup- 
ply. The  result  of  these  changes  was  a  violent  fluctua- 
tion from  the  old  market  ratio  between  the  two  metals, 
silver  falling  so  much  in  value  as  measured  by  gold  that 
to-day  it  requires  about  thirty-eight  ounces  of  silver  to  pur- 
chase one  of  gold.  In  other  words,  the  market  ratio  has 
changed  from  near  the  old  mint  ratio  of  15£  to  1  to  a 
ratio  of  about  38  to  1. 

Results  of  Monetary  Changes.  —  The  changes  which  we 


210       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

have  described  naturally  increased  the  value  of  money, 
and  thus  incidentally  all  debts,  and  produced  great  dis- 
tress. But  the  increase  in  the  debts  was  only  a  part  of 
the  mischief.  South  America  and  the  Oriental  countries 
being  on  a  silver  basis,  trade  had  easily  been  carried  on 
with  them  as  long  as  gold  and  silver  readily  exchanged 
at  an  established  ratio  ;  but  when  the  ratio  began  to  fluctu- 
ate, an  uncertain  and  disturbing  element  was  introduced 
into  trade,  rendering  it  highly  speculative,  and  therefore 
on  the  whole  less  profitable  to  the  world.  The  merchant 
in  Liverpool  who  sold  goods  to  a  merchant  in  India  would 
agree  to  receive  in  exchange  a  fixed  sum  of  silver  money  ; 
but,  as  it  was  necessary  for  the  English  merchant  to  ex- 
change this  silver  for  gold,  a  fall  in  the  value  of  silver 
during  the  progress  of  the  transaction  might  bankrupt 
him.  Under  these  conditions  exportation  of  manufactured 
goods  to  the  Orient  was  impeded,  and  to  the  same  extent 
production  in  India  and  China  was  artificially  stimulated. 
These,  in  brief,  are  some  of  the  difficulties  that  are  be- 
lieved by  many  to  have  resulted  in  great  measure  from 
the  general  demonetization  of  silver.  Bimetallism  has 
been  proposed  as  a  remedy.  Under  bimetallism  govern- 
ment would  coin  at  a  fixed  ratio  all  gold  and  silver  that 
anybody  desired  to  have  coined  ;  in  other  words,  govern- 
ment would  coin  gold  and  silver  on  private  account. 
Bimetallic  coinage  by  one  country  alone  is  called  national 
bimetallism.  It  is  generally  agreed  among  economists 
to-day  that  national  bimetallism  is  utterly  impracticable, 
because,  according  to  their  view,  no  country  is  commer- 
cially powerful  enough  to  furnish  such  a  demand  for  both 
metals  as  would  be  necessary  to  maintain  parity  of  value 
at  any  coinage  ratio  yet  proposed.  If,  on  the  other  hand, 


MONEY  211 

the  proposed  ratio  could  not  be  maintained,  then  other 
countries  might  send  to  it  all  their  silver  and  take  away 
its  gold,  by  the  simple  action  of  Gresham's  Law,  thus 
practically  reducing  the  country  to  a  silver  basis. 

With  international  bimetallism,  however,  which  means 
bimetallism  based  on  an  agreement  like  that  of  the  Latin 
Monetary  Union  before  1874,  the  case  is  quite  different. 
Economists  were  at  one  time  inclined  to  favor  such  a 
monetary  policy,  and  even  to-day  there  are  in  Europe  and 
America  some  economists  who  believe  such  international 
action  feasible  and  desirable.  They  believe  that  if,  for 
instance,  England,  the  United  States,  Germany,  and  France 
should  enter  into  such  an  agreement,  those  countries  could 
maintain  the  ratio.  International  bimetallists  remind  us 
that  gold  and  silver  are  used  principally  for  money,  and 
that  owners  of  gold  and  silver  would  be  obliged  by  the 
international  agreement  either  to  have  the  metal  coined 
at  the  government  ratio,  or  to  sell  it  in  the  market  for  use 
in  the  arts.  But  the  arts  absorb  only  a  relatively  small 
portion  of  the  annual  product,  and  a  very  much  smaller 
portion  of  the  total  existing  supply.  It  is  therefore  main- 
tained that  governments  are  in  the  position  of  monopolists, 
and  by  agreement  could  maintain  a  fixed  coinage  ratio. 
Moreover,  international  bimetallists  declare  that  as  a  re- 
sult of  such  action  greater  justice  would  be  done  to  cred- 
itors and  debtors  alike,  and  that  the  world's  business  would 
be  increased  because  of  the  greater  convenience  of  com- 
merce between  gold-using  and  silver-using  countries. 

RECENT  MONETARY  HISTORY 

The  Bland-Allison  Act  of  1878.  —  No  great  State  now 
coins  both  metals  freely,  but  the  government  of  the  United 


212       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

States,  as  well  as  others,  still  provides  a  place  for  silver 
in  its  currency.  By  the  Bland- Allison  Act  of  1878,  the 
Secretary  of  the  Treasury  was  required  to  coin  not  less 
than  12,000,000  worth  of  silver  nor  more  than  14,000,000 
worth  per  month.  Under  the  act  there  were  coined, 
down  to  August  12,  1890,  when  the  law  was  superseded, 
378,166,793  silver  dollars,  or  over  2,500,000  per  month. 
In  order  to  find  a  place  for  the  circulation  of  the  silver, 
silver  certificates  were  issued,  and  these,  being  more  con- 
venient to  carry,  circulated  among  the  people,  while  the 
silver  dollars  upon  which  they  were  issued  remained  in 
the  Treasury.  During  the  twelve  years  in  which  the 
Bland-Allison  Act  was  in  force,  silver  continued  to  fall 
in  value.  This  depreciation  suggested  two  opposite  rem- 
edies. Some,  attributing  the  fall  to  the  limitation  upon 
silver  coinage,  urged  free  coinage  as  a  cure ;  others,  be- 
lieving free  coinage  impracticable  and  the  existing  condi- 
tion dangerous,  urged  entire  suspension. 

The  Sherman  Act  of  1890.  —  After  a  long  struggle  in 
Congress,  a  compromise  bill  was  passed,  known  as  the 
Sherman  Act,  by  which  the  Secretary  of  the  Treasury 
was  authorized  to  purchase  4,500,000  ounces  of  silver  a 
month  (so  long  as  the  market  price  did  not  exceed  $1  for 
371^  grains  of  pure  silver)  paying  therefor  with  legal 
tender  notes  of  the  Treasury.  It  was  soon  found  that  the 
Sherman  Act  did  not  put  an  end  to  the  depreciation  of 
silver.  Moreover,  it  was  generally  believed  that  the  pur- 
chases under  the  Act  formed  a  great  and  increasing 
menace  to  the  security  of  our  currency. 

Repeal  of  the  Sherman  Act.  —  For  two  or  three  years 
there  were  heavy  exportations  of  gold  from  the  United 
States,  and  as  a  result  it  was  commonly  claimed  that  if 


MONEY  213 

the  Sherman  Act  were  not  soon  repealed,  gold  exporta- 
tions  would  continue  until  the  United  States  would  be 
driven  to  a  silver  basis.  During  this  same  critical  period, 
the  Indian  mint  was  closed  to  free  coinage  of  silver,  and 
the  price  of  that  metal  fell  within  three  days  from  82  cents 
to  67  cents  an  ounce.  Added  to  this  was  the  fact  that  the 
revenues  of  the  United  States  fell  off  until  they  were  less 
than  current  expenditures,  thus  creating  a  fiscal  deficit. 
This  combination  of  circumstances  led  to  a  special  session 
of  Congress  in  the  late  summer  of  1893,  which,  after  a 
bitter  fight,  repealed  the  purchasing  clause  of  the  Sherman 
Act. 

The  Currency  Act  of  1900. — Between  1893  and  1900 
the  monetary  situation  gradually  improved,  although  for 
two  or  three  years  the  United  States,  in  order  to  protect 
the  currency,  was  driven  to  repeated  issues  of  bonds  under 
very  humiliating  circumstances.  The  defeat  of  the  Demo- 
cratic candidate  for  President  in  1896,  who  ran  on  a  plat- 
form declaring  for  "the  free  and  unlimited  coinage  of 
silver  and  gold  at  the  ratio  of  16  to  1,  by  the  independent 
action  of  the  United  States,"  paved  the  way  for  a  new 
currency  bill  which  was  passed  by  Congress  March  14, 
1900.  This  act  expressly  declares  that  the  gold  dollar 
shall  be  the  standard  of  value  in  the  United  States,  and 
that  all  other  kinds  of  money  are  to  be  maintained  at 
a  parity  with  gold.  It  further  requires  the  United  States 
Treasurer  to  maintain  a  special  reserve  fund  for  the 
redemption  of  United  States  notes.  This  fund  must  in 
all  cases  amount  to  $150,000,000  in  gold  or  in  gold  and 
redeemed  notes.  If  the  amount  of  gold  falls  below 
$100,000,000,  and  the  redeemed  notes  which  constitute 
the  remainder  of  the  fund  cannot  at  the  time  be  exchanged 


214        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

for  gold  in  the  general  treasury,  short  time  gold  bonds 
may  be  issued  and  sold  to  make  up  the  deficiency  in  the 
reserve.  As  to  silver  coinage,  the  act  calls  for  the  coin- 
age of  silver  dollars  from  the  already  existing  stock  of 
silver,  until  the  number  of  such  dollars  shall  equal  the 
amount  represented  by  the  "Treasury  notes  of  1890," 
issued  to  pay  for  the  silver.  These  silver  dollars,  or  the 
corresponding  silver  certificates,  are  to  be  paid  out  in  re- 
demption of  the  "Sherman  notes,"  as  fast  as  such  notes  are 
presented  at  the  Treasury.  When  all  the  Sherman  notes 
shall  have  been  redeemed,  the  remainder  of  the  silver 
bullion  purchased  by  the  government — representing  the 
seigniorage  from  the  silver  coinage  —  is  to  be  coined  into 
subsidiary  silver. 

It  will  be  seen,  therefore,  that  by  the  terms  of  this  recent 
monetary  legislation,  strong  provision  has  been  made  for 
securing  parity  of  all  parts  of  our  money,  and  for  strength- 
ening the  position  of  the  United  States  as  a  country  of 
gold  monometallism. 

International  Monetary  Conferences. — The  strong  desire 
for  international  bimetallism  which  was  felt  both  by 
economic  theorists  of  repute  and  by  practical  statesmen 
in  many  lands  has  led  to  repeated  monetary  conferences, 
which  have  usually  received  the  vigorous  support  of  the 
United  States.  The  most  noteworthy  of  these  were  the 
Paris  Conference  of  1878  and  the  Brussels  Conference  of 
1892.  Nothing  whatever  has  come  of  these  expert  dis- 
cussions. Inertia  and  the  quiet  opposition  of  a  great  part 
of  the  business  world  have  been  more  potent  than  the 
activity  of  the  bimetallists.  England,  as  a  great  creditor 
nation,  has  led  the  opposition  to  all  plans  for  interna- 
tional action. 


MONEY  215 

Whatever  we  may  think  of  the  economic  arguments  of 
the  international  bimetallists,  we  must  remember  that  a 
great  political  obstacle  stands  in  the  way  of  the  fruition 
of  their  hopes.  The  monetary  history  of  the  last  twenty- 
five  years  seems  to  show  conclusively  that  international 
bimetallism  is  losing  rather  than  gaming  in  favor ;  and 
therefore  those  who  favor  international  bimetallism,  recog- 
nizing the  hopelessness  of  attaining  their  ideal,  may  well 
afford  to  unite  with  their  former  opponents  in  securing 
the  best  monetary  system  that  offers  hope  of  realization. 

SUMMARY 

1.  Money  serves  as  a  medium  of  exchange,  a  measure  of  values,  a 

standard  of  deferred  payments,  and  a  store  of  value. 

2.  The  precious  metals  have  certain  desirable  qualities  that  have 

given  them  first  place  for  money  use. 

3.  Governments  do  not  create,  but  they  do  increase  the  value  of  money. 

4.  The  general  theory  of  competitive  value  applies  to  the  value  of 

money,  or  general  prices. 

5.  Stability,  the  great  desideratum  in  money,  is  opposed  to  inflation 

and  contraction. 

6.  Bimetallism  has  been  advocated  as  a  policy  to  secure  stability; 

but  the  recent  tendency  has  been  away  from  bimetallism  to  gold 
monometallism. 

QUESTIONS 

1.  Name  the  qualities  desirable  in  money.     Mention  different  things 

that  have  been  used  as  money. 

2.  What  is  coinage  ?    Free  coinage  ?    Gratuitous  coinage  ?    Brassage  ? 

Seigniorage  ? 

3.  Discuss  the  relation  of  government  to  money. 

4.  Discuss  the  quantity  theory  of  the  value  of  money. 

5.  What  are  the  advantages  of  paper  money  ?    Its  dangers  ?    From  an 

examination  of  actual  paper  money,  name  and  describe  the  dif- 
ferent kinds  that  are  used  in  the  United  States. 


216       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

6.  What  are  the  evils  of  inflation?    Of  contraction?    How  much 

money  does  a  country  need  ? 

7.  What  is  bimetallism ?    International  bimetallism?    What  was  the 

Latin  Monetary  Union? 

8.  What  was  the  Bland- Allison  Act?    The  Sherman  Act?    The  Act 

of  1893?    The  Act  of  1900? 

9.  What  international  monetary  conferences  have  been  held,  and 

what  has  been  their  result? 

LITERATURE 

Jevons,  W.  S.  :  Money  and  the  Mechanism  of  Exchange,  Ch.  VIII  (the 
four  pages  on  Gresham's  Law). 

Kinley,  David :  Money,  A  Study  of  the  Theory  of  the  Medium  of  Ex- 
change, especially  Chapter  V. 

Laughlin,  J.  L. :  The  Principles  of  Money. 

Nicholson,  J.  S. :  Money  and  Monetary  Problems. 

Report  of  the  Indianapolis  Monetary  Commission. 

Scott,  W.  A. :  Money  and  Banking,  pp.  69-72. 

Walker,  F.  A.:  Money,  Part  I,  Ch.  I,  pp.  1-10;  also  Money,  Trade, 
and  Industry,  and  International  Bimetallism. 

White,  Horace :  Money  and  Banking,  Part  I,  Ch.  H,  pp.  23-29. 


CHAPTER  V 
CREDIT  AND  BANKING 

What  Credit  Is. —  We  have  seen  the  immense  develop- 
ment in  exchange  that  has  been  made  possible  by  the 
use  of  money,  —  a  development  resulting  in  the  division 
and  organization  of  labor  and  a  revolution  of  the  whole 
economic  life.  Yet  money  alone  as  a  medium  of  exchange 
is  entirely  inadequate  to  explain  the  magnitude  of  present 
commercial  transactions.  Great  as  is  its  advantage  over 
barter,  money  is  too  clumsy  an  instrument  for  many 
modern  purposes.  While  it  is  by  no  means  dispensed 
with  in  our  own  day,  money  is  primarily  characteristic 
of  the  economic  stage  preceding  our  own.  The  charac- 
teristic instrument  of  exchange  in  our  day  is  not  money, 
but  credit. 

Like  so  many  other  terms  which  economics  borrows  from 
the  language  of  everyday  life,  the  word  "  credit "  has  many 
meanings  and  shades  of  meaning.  One  of  the  commonest 
of  these  is  indicated  when  we  say  that  a  man's  credit  is 
good  or  that  he  has  good  credit,  by  which  we  mean  that 
he  has  the  reputation  of  paying  his  debts  and  has  the 
ability  to  do  so,  and  that  therefore  other  men  are  willing 
to  sell  him  goods  and  to  wait  for  their  pay  until  a  future 
period.  Another  important  meaning  of  the  word  refers 
to  the  character,  not  of  the  man,  but  of  the  transaction 
itself.  The  transfer  of  goods  with  the  expectation  of 
future  payment  is  a  credit  transaction.  This  is  the  idea 

217 


218       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

which  we  embody  in  the  word  "  credit "  in  the  science  of 
economics.  We  may  therefore  define  the  term  as  follows: 
A  credit  transaction  is  a  transfer  of  goods  for  a  promise  of 
a  future  equivalent.  First,  it  should  be  noticed  that  the 
transaction  is  partly  present  and  partly  future,  or,  in 
other  words,  credit  contains  an  element  of  time.  In  the 
second  place,  it  is  to  be  remarked  that  the  transaction  in- 
volves confidence  either  (a)  in  the  character  and  resources 
of  the  borrower  or  (6)  in  the  sufficiency  and  security  of 
goods  which  he  may  have  pledged  for  the  fulfilment  of 
his  promise.  A  third  factor  frequently  present  is  a  writ- 
ten evidence  of  indebtedness,  given  by  the  borrower  to  the 
lender.  This  writing  constitutes  the  instrument  of  credit. 

The  Mechanism  of  Credit.  —  The  mechanism  of  credit, 
or  the  machinery  by  which  credit  operations  are  carried 
on,  consists  of  two  parts :  (I)  the  instruments  of  credit,  — 
the  evidences  of  indebtedness,  —  such  as  checks,  drafts, 
notes,  bonds,  etc. ;  and  (II),  the  institutions  of  credit,  con- 
sisting principally  of  banks  and  clearing-houses. 

I.  Instruments  of  Credit.  —  Among  the  instruments  of 
credit  the  simplest  and  most  extensively  used  is  the  (1) 
check.  A  check  is  an  order  upon  a  bank  by  an  individual 
or  company  requiring  the  payment  of  a  certain  sum  of  money 
to  the  order  of  a  person  named  or  to  the  holder  of  the  check. 
In  this  form  of  credit  the  element  of  time  plays  a  very 
small  part.  If  money  were  paid  instead  of  a  check,  the 
person  receiving  it  would  be  likely  to  deposit  it  in  a  bank. 
Receiving  a  check,  he  carries  it  to  the  bank.  The  element 
of  credit  here  prominent  is  the  trust  or  confidence  in- 
volved, the  confidence  that  the  check  will  be  honored  by 
the  bank  upon  which  it  is  drawn. 

Bankers  also  use  checks.     When   one   banker  gives  a 


CREDIT  AND  BANKING  219 

check  on  another,  the  instrument  is  usually  called  a 
(2)  draft.  Another  form  of  draft  arises  when  a  bank  or 
a  company  or  an  individual  orders  the  payment  of  a  sum 
of  money  to  a  bank.  When,  however,  the  drawer  and 
drawee  of  a  draft  live  in  different  countries,  the  instru- 
ment is  often  called  a  bill  of  exchange.  Both  these  terms 
are  so  loosely  and  variously  used  that  the  reader  must 
usually  judge  a  writer's  meaning  from  the  context. 

A  third  form  of  instruments  of  credit  consists  of  (3) 
notes,  which  are  usually  promises  to  pay  a  certain  sum  of 
money  for  value  received,  under  conditions  named,  on  demand 
or  at  the  expiration  of  a  certain  period.  Here  the  time 
element  is  important,  and  is  recognized  by  the  payment  of 
interest.  Such  notes  are  of  three  general  kinds,  accord- 
ing to  the  character  of  the  maker,  (#)  Individuals  and 
companies  issue  promissory  notes  for  payment  on  demand 
or  within  a  certain  time.  (6)  Banks  in  most  countries 
issue  notes  which  commonly  pass  as  money  and  which 
have  a  different  legal  standing  than  belongs  to  the  notes 
of  individuals.  Such  are  the  national  bank  notes  of  the 
United  States,  (c)  Governments  themselves  often  issue 
notes  such  as  those  which  we  have  already  discussed  in 
treating  of  the  subject  of  paper  money.  Bank  notes  and 
government  notes  do  not  usually  bear  interest. 

Ordinary  instruments  of  credit  do  not  circulate  freely 
like  money,  but  are  intended  to  be  used  primarily  in  one 
transaction  ;  yet  they  are  by  no  means  confined  to  this. 
Thus  checks  and  drafts  often  pass  through  many  hands, 
and  notes  are  often  transferred  once,  twice,  or  many  times. 
With  bank  notes  and  government  notes,  however,  which 
circulate  as  money,  the  case  is  quite  different.  These  are 
(1)  intended  for  general  use  ;  (2)  they  are  always  drawn 


220        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

to  bearer;  (3)  they  are  issued  in  fixed  and  convenient 
denominations;  and  (4)  the  credit  of  the  issuing  agent 
is  usually  taken  as  a  matter  of  course. 

Credit  transactions  between  individuals  usually  take 
one  of  the  two  following  forms:  (1)  usually  a  person 
buying  goods  promises  to  pay  the  person  from  whom  the 
goods  are  bought ;  but,  instead,  (2)  the  seller  may  "  draw 
on"  the  buyer  by  means  of  a  bill  of  exchange  which  in 
such  cases  is  also  sometimes  called  a  draft,  if  both  parties 
to  the  exchange  reside  in  the  same  country.  Let  us  sup- 
pose that  A  is  the  seller  and  B  a  buyer  in  a  distant  place. 
A  writes  an  order  upon  B  to  pay  to  him  or  to  a  third 
party,  C,  the  amount  of  the  debt.  If  B  on  receipt  of  the 
order  acknowledges  the  debt  and  is  ready  to  agree  to  pay 
it,  he  writes  accept  on  the  bill  and  signs  his  name.  This 
act  is  called  an  acceptance.  The  instrument  thus  becomes 
legally  binding  upon  the  acceptor. 

Checks  and  notes  may  be  transferred  by  indorsement. 
The  payee,  by  writing  his  name  on  the  back  of  the  instru- 
ment, orders  the  payment  of  the  money  to  another  person 
whom  he  names  in  writing.  By  thus  indorsing  the  instru- 
ment, he  becomes  responsible  for  its  payment  in  case  the 
one  who  precedes  him  in  responsibility  fails  to  make  the 
payment.  The  person  to  whom  such  an  instrument  is 
indorsed,  or  the  indorsee,  may  also  in  turn  become  an 
indorser,  in  which  case  he  also  assumes  similar  responsi- 
bility. 

Book  credit  (4)  is  another  form  of  credit  which  is  exten- 
sively used,  especially  in  retail  trade.  When  goods  are 
sold,  a  record  is  kept,  or,  as  we  ordinarily  say,  the  goods 
are  "  charged,"  a  bill  for  the  amount  being  sent  at  a  later 
time.  Where  two  persons  mutually  grant  book  credit,  as 


CREDIT  AND  BANKING  221 

is  often  the  case  among  merchants  in  small  places,  only 
balances  need  be  paid  in  money  on  settling  day. 

II.  Institutions  of  Credit:  Banks  and  Clearing-houses. 
—  Bankers  have  already  been  mentioned  as  middlemen  in 
credit  transactions.  They  are  sometimes  called  dealers  in 
credits,  and  indeed  there  is  little  that  they  do  which  is 
not  in  one  way  or  another  connected  with  credit.  But 
banks  are  not  mere  agents.  They  have  a  capital  of  their 
own  which  serves  as  a  guarantee  fund,  and  they  receive 
money  which  customers  deposit  with  them.  Under  legal 
regulation  they  mingle  the  deposits  with  their  own  capital 
and  have  exclusive  control  over  it  all.  They  are  debtors 
of  their  depositors,  and  creditors  of  those  to  whom  they 
lend  money.  Their  source  of  profit  is  not  exclusively  nor 
even  chiefly  their  own  capital,  but  rather  the  funds  de- 
posited with  them.  As  a  rule,  commercial  banks  either 
pay  no  interest  on  deposits  or  they  pay  interest  at  a  rate 
considerably  lower  than  that  charged  on  money  loaned, 
the  difference  constituting  their  chief  source  of  profit. 

In  earlier  times  nearly  all  banks  in  the  United  States 
issued  notes  which  circulated  as  money.  Indeed,  such 
note  issues  were  commonly  regarded  as  the  principal  busi- 
ness of  banks.  Now  only  national  banks  are  able  profit- 
ably to  issue  notes,  and  they  are  required  to  deposit  bonds 
at  Washington  as  security  for  the  circulation,  besides  pay- 
ing a  special  tax  for  the  privilege.  In  nearly  all  civilized 
countries,  the  power  of  banks  to  issue  circulating  notes 
has  been  greatly  restricted,  and  the  number  of  banks  that 
find  a  source  of  profit  in  such  issue  is  constantly  diminish- 
ing. 

It  would  take  us  too  far  afield  were  we  to  enter  upon 
a  complete  discussion  of  the  various  kinds  of  banks  and 


222        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

their  precise  differences.  Briefly,  we  may  say  that  any  in- 
stitution that  (a)  discounts  notes  or  other  forms  of  com- 
mercial paper,  and  (6)  receives  and  holds  deposits,  is  a 
commercial  bank,  whether  or  not  it  issues  notes,  and 
whether  or  not  it  is  incorporated  by  law.  When  the  word 
"bank"  is  used  alone  it  always  refers  to  such  an  institution. 
Savings  banks  are  therefore  not  banks  in  the  legal  sense 
of  the  word.  The  three  classes  of  regular  banks  in  the 
United  States  are  our  national  banks,  numbering  about 
4500 ;  state  banks,  which  with  trust  companies  number 
about  4500 ;  and  private  or  unincorporated  banks,  which 
also  probably  number  about  4000.  Trust  companies, 
which  are  of  recent  development  and  of  rapidly  growing 
importance,  are  incorporated  institutions  differing  little 
from  banks.  In  fact,  many  bankers  insist  that  the  busi- 
ness done  by  the  larger  proportion  of  the  great  trust 
companies  is  a  strictly  banking  business,  and  that  this  fact 
should  be  kept  in  mind  by  legislators  and  administrators. 
At  present  such  companies  seem  to  enjoy  most  of  the  privi- 
leges granted  to  incorporated  banks,  without  being  com- 
pelled to  observe  the  restrictions  by  which  banks,  as  the 
result  of  experience,  have  been  surrounded.  Within  the 
last  decade  this  condition  of  comparative  irresponsibility 
has  made  it  possible  for  such  companies  to  invest  in  doubt- 
ful securities  and  thus  to  help  in  the  "  flotation  "  of  unsound 
industrial  enterprises.  It  would  seem  to  be  advisable  that 
trust  companies  should  be  subjected  to  supervision  at  least 
as  rigorous  as  that  which  is  provided  for  national  banks 
by  the  Federal  law. 

The  nature  of  banking  operations  will  be  made  clearer 
by  an  examination  of  the  following  statement  of  the  con- 
dition of  a  national  bank  :  — 


CREDIT  AND  BANKING 


223 


RESOURCES 

Loans  and  discounts  .  $209,682.15 
Overdrafts  ....  561.08 
U.  S.  bonds  ....  12,500.00 
Stocks,  securities,  etc.  2,750.00 
Bank  building,  furni- 
ture, etc 7,175.00 

Due    from    approved 

reserve  agents    .     .  71,709.49 
Checks  and  other  cash 

items 1,346.55 

Bills  of  other  national 

banks 1,500.00 

Fractional    currency, 

nickels  and  cents  .  191.37 

Specie 14,659.95 

Legal  tender  notes    .  4,500.00 
Redemption  fund  with 

U.  S.  treasurer  .  562.50 


$327,138.89 


LIABILITIES 

Capital  stock  paid  in  $50,000.00 

Surplus  fund    .     .     .  15,000.00 

Undivided  profits  .     .  3,149.64 
National  bank  notes 

outstanding  .     .     .  11,250.00 

Individual  deposits    .  247,739.25 


$327,138.89 


Notice  that  on  the  liability  side  the  first  three  items 
are  liabilities  in  a  different  sense  from  the  last  two :  for 
the  capital  stock,  surplus,  and  profits  the  bank  is  liable 
to  its  stock-holders;  for  circulating  notes  and  deposits, 
it  is  liable  to  outside  persons.  Also,  notice  the  relation 
between  the  total  amount  of  cash  on  hand  and  the  deposits, 
and  compare  the  total  investment  of  the  stock-holders  with 
the  amount  of  loans  and  discounts. 

Clearing-houses.  —  Clearing-houses  were  originally  con- 
trived by  the  employees  of  banks  with  the  object  of 
saving  time  and  labor.  Banks  in  a  city  have  continual 
dealings  with  one  another.  A  regular  customer  of  a  bank 
deposits  with  it  all  the  checks  that  he  receives,  no  matter 
on  what  bank  they  may  have  been  drawn.  It  therefore 


224       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

happens  that  every  bank  in  any  of  our  cities  receives 
checks  every  day  drawn  on  the  other  banks,  while  the 
other  banks  receive  checks  on  it.  Formerly  there  was 
continual  running  back  and  forth  among  banks  to  balance 
their  accounts.  Now  the  representatives  of  all  the  banks 
in  clearing-house  cities  meet  daily  in  the  clearing-house 
and  exchange  their  obligations,  only  the  differences  be- 
tween the  sums  due  being  paid.  These  differences  are 
paid  by  the  debtor  banks  to  the  clearing-house,  and  by 
the  clearing-house  in  turn  to  the  creditor  banks. 

Clearing-house  statistics  show  the  inadequacy  of  money 
alone  to  do  the  business  of  the  modern  industrial  world. 
The  total  transactions  of  the  clearing-houses  in  the  cities 
of  the  United  States  for  the  year  ending  September  30, 
1903,  amounted  to  $114,068,837,569,  or  about  forty-two 
times  as  much  as  all  the  money  in  the  country,  bank  notes 
included ;  for  the  money  in  the  country  August  1,  1902,  in 
the  United  States  Treasury  and  in  circulation,  was  only 
$2,695,440,174.  The  small  proportion  of  actual  money 
transfers  necessary  in  paying  clearing-house  balances 
illustrates  the  same  fact.  Thus  in  the  year  ending  Sep- 
tember 30,  1903,  the  New  York  Clearing-house,  which 
includes  56  banks  in  its  membership,  cleared  transactions 
amounting  to  $70,833,655,940,  by  making  money  payments 
for  total  balances  of  only  $3,315,516,487.  The  average 
daily  clearings  were  $233,005,447,  while  the  average  daily 
balances  paid  in  money  amounted  to  only  $10,906,304,  so 
that  the  balances  were  only  4.68  per  cent  of  the  clearings. 

The  Advantages  of  Credit.  —  It  remains  for  us  to  sum 
up  in  separate  paragraphs  the  advantages  and  evils  which 
attend  the  great  development  of  credit  in  modern  indus- 
trial society. 


CREDIT  AND  BANKING  225 

1.  Credit  saves  time  and   labor  by  furnishing   a   more 
perfect  and  convenient  means  of  payment  in  large  sums 
and  between  distant  places  than  is  furnished  by  the  precious 
metals.    Thus  in  international  trade,  relatively  small  sums 
of  money  have  to  be  sent  from  one  country  to  another, 
only  balances  being  paid  in  money.     If  certain  London 
merchants  owe  New  York  merchants  £  1,000,000  for  cotton 
shipped,  while  the  same   or  other  New  York   merchants 
owe  the  same  or  other  London  merchants  X  1,000,000  for 
importations  from  Europe,  it  is  obvious  that  no  money 
need  leave  either  country.     The  London  merchants  may 
send  orders  to  their  New  York  debtors  to  pay  their  New 
York  creditors.     This  is  the  simplest  kind   of   cancella- 
tion of  indebtedness.     In  actual  life,  the  process  is  more 
complex,  but  the  underlying  principle  is  the  same.     New 
York   merchants   owe    London    merchants ;    Paris    mer- 
chants owe  New  York  merchants ;  London  merchants  owe 
Paris  merchants,  etc.     By  exchanging  orders  among  the 
different  debtors  and  creditors  a  large  part  of  the  total 
debts    may    always    be    paid    without    the    shipment    of 
money. 

2.  Credit  saves  capital  by  taking  the  place  of  corre- 
sponding amounts  of  gold  and  silver.     In  this  way  society 
is  enabled  to  employ  a  larger  portion  of  the  precious  metals 
for  other  useful  purposes. 

3.  Credit  renders  capital  more  productive.     Under  our 
credit  system  he  who  possesses  capital,  but  is  unable  to  use 
it,  may  transfer  it  for  a  compensation  to  another  person 
who   can  employ  it  productively,  and  thus  both  debtor 
and  creditor,  as  well  as  the  public  economy,  are  benefited. 
Other  things  being  equal,  capital  is  loaned  to  those  who 
will  pay  the  most  for  it,  and  under  normal  conditions  these 


226       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

must  be  the  ones  who  can  employ  it  most  productively 
There  are  evidently  two  sides  to  this  advantage.  On  the 
one  hand,  as  we  have  just  said,  credit  enables  those  who 
have  capital,  but  who  are  without  the  disposition  or  ability 
to  use  it  productively,  so  to  place  their  capital  that  they 
themselves  receive  benefit  while  furthering  social  produc- 
tion. On  the  other  hand,  credit  enables  those  who  have 
great  business  qualifications,  but  who  have  inadequate 
capital  or  no  capital  at  all,  to  employ  their  energies  and 
talents  for  their  own  benefit  in  furthering  the  welfare  of 
society.  In  many  cases  credit  brings  together  capital 
without  directive  power  and  directive  power  without 
capital,  and  thus  serves  to  unite  capital  and  labor. 

4.  Credit  furthers  the  accumulation  of  capital  by  gather- 
ing together  the  very  smallest  sums,  as,  for  instance,  in 
savings  banks.  Such  small  sums,  forming  in  the  aggre- 
gate large  masses  of  capital,  are  loaned  out  by  those  who 
are  responsible  for  them  to  joint-stock  companies  and 
other  productive  concerns.  In  this  way  the  capital  itself 
is  concentrated  while  its  returns  are  scattered  widely  among 
the  people.  Moreover,  credit  furthers  the  accumulation 
of  capital  by  promoting  thrift,  since  it  both  helps  and 
encourages  men  to  provide  for  emergencies  and  for  old 
age.  This  is  particularly  the  case  with  institutions  that 
supply  capital  to  the  poorer  classes,  and  with  American 
building  associations,  which  furnish  the  same  classes  with 
capital  for  the  construction  of  homes. 

Evils  of  Credit.  —  But  we  must  not  overlook  the  dark 
side  of  our  credit  economy.  Without  expanding  upon  the 
evils  of  credit  we  may  mention  some  of  the  more  important 
of  them  as  follows :  — 


CREDIT  AND  BANKING  227 

1.  Credit  frequently  encourages  extravagance,  which  is 
a  fruitful  source  of  fraud  and  embezzlemeut.     Men  who 
are  granted  credit  often  overrun  reasonable  bounds,  and 
then  in  their  despair  resort  to  desperate  expedients  in  the 
hope  of  release. 

2.  Credit  prompts  precarious  speculation.     Those  who 
speculate  with  the  capital  of  other  people  are  proverbially 
careless.     Our  entire  land   is   strewn  with  the  ruins   of 
businesses  wrecked  by  men  who  have  mismanaged  the 
property   which   unwise    credit   gave    into   their    hands. 
When   such   management   assumes  unusually  large  pro- 
portions, credit  becomes  a  powerful  factor  in  precipitating 
a  disastrous  panic  and  crisis. 

Some  writers  have  claimed  that  all  productive  credit  — 
credit  used  in  carrying  on  a  business  —  is  good,  and  that 
the  evils  of  credit  arise  only  in  connection  with  consump- 
tive credit,  that  is,  credit  which  enables  one  to  spend 
money  for  personal  gratification ;  but  while  there  is  a  modi- 
cum of  truth  underlying  this  distinction,  the  line  cannot 
be  so  sharply  drawn.  Consumptive  credit  does  frequently 
lead  to  extravagance,  but  it  also  enables  many  a  young 
man  to  develop  personal  powers  and  to  become  a  great 
artist  or  scholar  ;  on  the  other  hand,  productive  credit, 
while  normally  resulting  in  great  advantages  to  society, 
sometimes  opens  the  way  to  putting  business  at  the  mercy 
of  ignorance,  incompetence,  and  dishonesty. 

We  may  conclude  the  matter  by  saying  that  we  should 
do  all  within  our  power  as  a  society  to  preserve  the  ad- 
vantages, while  reducing  the  evils  of  credit  to  a  minimum. 
It  is  a  hopeful  indication  of  progress  in  this  direction  that 
more  and  more  attention  is  being  given  by  the  public  to 
a  demand  for  full  publicity  in  the  management  of  great 


228        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

business  undertakings.  Such  publicity  will  go  far  toward 
obviating  one  of  the  most  apparent  and  general  of  the 
abuses  of  credit  which  we  have  enumerated. 

SUMMARY 

1.  Money  having  proved  inadequate  to  the  needs  of  modern  ex- 

change, credit  has  displaced  it  for  ordinary  large  transactions. 

2.  Credit  means  the  transfer  of  goods  in  the  present  for  a  promise 

of  an  equivalent  amount  of  goods  to  be  repaid  at  a  future  time. 
Hence  there  are  two  fundamental  elements  to  be  distinguished : 
time  and  confidence. 

3.  The  chief  instruments  of  credit  are  checks,  drafts,  and  bills  of  ex- 

change, promissory  notes,  bank  notes,  and  government  notes, 
and  "  book  accounts." 

4.  Banks  are  institutions  for  facilitating  credit  transactions ;  clearing- 

houses are  institutions  for  facilitating  transfers  of  credit  among 
banks. 

5.  Credit  saves  the  time  and  labor  involved  in  money  payments ;  it 

saves  capital,  promotes  the  accumulation  of  capital,  and  makes 
a  given  amount  of  capital  more  productive. 

6.  Credit  often  leads  to  speculation  and  fraud ;  it  encourages  extrava- 

gance and  waste  in  public  and  private  consumption. 

QUESTIONS 

1.  What  different  meanings  has  the  word  "credit "  ?    In  which  sense 

is  it  most  often  used  in  economics  ? 

2.  In  what  cases  is  there  but  little  time  advantage  in  credit  ?    Men- 

tion cases  in  which  the  element  of  confidence  is  very  slight. 

3.  What  is  a  check  ?    A  bill  of  exchange  ?    A  bank  draft  ?    What  is 

a  note?  A  bond?  What  is  the  advantage  of  a  note?  Of  a 
check  ? 

4.  What  effect  does  credit  have  upon  the  productiveness  of  capital  ? 

Why  ?  Upon  the  accumulation  of  capital  ?  How  ?  What  con- 
nection have  these  two  results  ? 

5.  What  are  the  evils  of  credit  ?    How  do  the  evils  to  society  compare 

with  the  evils  to  individuals? 


CREDIT  AND  BANKING  229 

6.  What  is  a  bank?    What  functions  are  necessary  to  the  idea  of  a 

bank  ?  What  other  function  or  functions  do  some  banks  exer- 
cise? How  do  banks  reap  a  profit?  Why  is  this  proper  and 
legitimate  ? 

7.  What  advantages  has  bank  money?    What  dangers?    What  is  the 

tendency  to-day  regarding  bank-note  issue  ? 

8.  What  is  a  clearing-house  ?    About  what  is  the  extent  of  transac- 

tions through  the  clearing-houses  of  the  country?  How  does 
this  compare  with  the  amount  of  money  in  circulation  ?  What 
bearing  has  this  fact  upon  the  relative  importance  of  money 
and  credit  in  modern  industry  ?  How  are  balances  paid  ?  To 
whom  are  the  balances  first  paid  ? 

LITERATURE 

See  literature  at  close  of  preceding  chapters.     Also :  — 

Bagehot,  Walter :  Lombard  Street,  Ch.  II,  pp.  21-27. 

Bolles,  A.  S. :  Practical  Banking,  and  Money,  Banking,  and  Finance. 

Cannon,  J.  G. :    Clearing-houses,  Ch.  XII. 

Conant,  C.  A.:  History  of  Modern  Banks  of  Issue. 

Dunbar,  C.  F. :  The  Theory  and  History  of  Banking,  Ch.  II,  pp.  9-16. 

Gilbart,  J.  W. :  History,  Principles,  and  Practice  of  Banking. 

Knox,  J.  J. :  History  of  Banking  in  the  United  States. 

MacLeod,  H.  D. :  Elements  of  Banking. 

Patten,  C.  B. :  Methods  and  Machinery  of  Practical  Banking.     (A  book 

much  used  by  bank  clerks.) 
Scott,  W.  A. :  Money  and  Banking,  pp.  117-120. 
White,  II. :  Money  and  Banking,  pp.  240-255. 


CHAPTER  VI 
INTERNATIONAL   TRADE 

THE  subject  of  international  trade  calls  for  somewhat 
extended  study  before  we  leave  the  division  of  transfers 
or  exchange.  Nations  do  not  live  to  themselves  alone. 
More  and  more  with  the  passing  years  trade  is  overleap- 
ing narrow  local  limits  and  is  becoming  world-wide  in 
extent.  International  trade  is  always  in  the  last  analysis 
trade  between  pairs  of  individuals,  and  is  in  many  respects 
precisely  similar  to  trade  among  individuals  in  a  single 
community  or  country.  But  there  are  certain  features  in 
which  it  differs  so  materially  from  trade  within  a  nar- 
rower area  or  within  a  single  political  unit  that  it  calls  for 
special  treatment. 

In  the  present  chapter  we  shall  first  study  the  nature 
of  international  trade,  and  shall  conclude  with  a  discus- 
sion of  the  restrictions,  usually  in  the  form  of  tariff  duties, 
laid  by  nations  upon  international  commerce. 

I.   THE  NATURE  OF  INTERNATIONAL  TRADE 

An  Exchange  of  Goods  for  Money.  —  Whenever  an  indi- 
vidual in  one  country  sells  goods  to  an  individual  in 
another  country,  he  sells  the  goods  for  money  just  as  he 
would  to  a  person  in  his  own  community.  But  owing  to 
the  difficulty  and  risk  of  sending  money  back  and  forth  in 
payment  of  individual  claims  resulting  from  innumerable 
sales  and  purchases,  great  banking  houses  have  developed 

230 


INTERNATIONAL  TRADE  231 

a  system  by  which  the  greater  part  of  such  transactions 
are  effected  without  the  use  of  money  at  all.  The  system 
of  international  exchange  is  quite  like  that  of  the  clear- 
ing-house, which  has  already  been  explained.  When  an 
American  exporter  sends  goods  to  an  English  importer, 
there  are  two  methods  by  which  payment  may  be  made. 
More  commonly  the  exporter  "draws  on"  the  importer 
for  the  agreed  amount ;  that  is,  he  writes  an  order  upon 
the  importer  to  pay,  usually  at  some  specified  place,  the 
amount  named  in  the  face  of  the  bill.  This  bill  of  ex- 
change, attached  to  a  bill  of  lading  of  the  goods  and  other 
documents,  the  exporter  sells  to  a  bank,  which  thus  pur- 
chases a  right  to  have  a  certain  amount  of  money  paid  at 
its  order  in  England.  The  other  method  of  closing  such 
a  transaction  is  for  the  English  importer  to  go  to  an  Eng- 
lish bank  and  there  purchase  a  draft  drawn  by  the  bank 
upon  an  American  bank  in  favor  of  the  American  exporter. 
In  either  case,  if  the  transaction  stood  alone,  money  would 
have  to  cross  the  ocean  to  pay  for  the  goods.  But,  as  a 
matter  of  fact,  English  exporters  are  at  the  same  time 
shipping  goods  to  American  importers,  and  are  thus  se- 
curing counter  claims  upon  Americans.  It  is  evident  that 
if  the  claims  upon  the  one  side  equal  the  claims  upon  the 
other,  no  money  need  be  sent,  provided  the  various  claims 
are  brought  together  and  cancelled.  It  is  precisely  this 
function  that  banking  houses  doing  an  international  busi- 
ness perform.  They  buy  bills  from  exporters  and  sell 
drafts  to  importers. 

We  have  here  assumed  that  only  two  countries  are 
parties  to  the  international  exchange.  When  we  consider 
the  case  of  several  nations  or  of  all,  there  is  no  difference 
except  in  the  greater  complexity.  Thus  it  is  evident  that 


232        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

if  A  in  New  York  owes  a  sum  of  money  to  B  in  London, 
while  C  in  London  owes  the  same  amount  to  D  in  Paris, 
and  E  in  Paris  in  turn  owes  the  same  amount  to  F  in  New 
York,  the  debts  of  all  may  be  settled  without  a  cent  of 
money  leaving  any  one  of  the  countries. 

The  Rate  of  Exchange.  —  An  English  gold  pound  equals 
by  weight  $4.866  in  American  money.  Hence,  in  the 
above  case,  if  bankers  made  no  charge  for  their  services, 
the  rate  of  exchange  between  New  York  and  London 
would  stand  at  <£!  for  $4.866,  or  exchange  would  be  at 
par.  Let  us  see  now  some  of  the  forces  which  determine 
how  far  above  or  below  par  the  rate  may  go. 

The  Balance  of  Trade.  —  Assuming  for  the  moment  that 
the  only  transactions  affecting  international  exchange  are  the 
exports  and  imports  of  commodities,  we  can  see  that  if  at  any 
time  one  country  —  America,  for  example  —  is  importing  more 
goods  from  England  than  it  is  exporting,  the  balance  of  trade 
is  for  the  time  against  that  country.  In  such  a  state  of  things, 
New  York  banks  will  have  many  demands  for  drafts  upon 
London  and  few  offerings  of  bills  on  London.  Conversely, 
London  banks  will  have  many  offerings  of  bills  on  New  York, 
but  few  demands  for  drafts  upon  New  York. 

But  it  is  the  purpose  of  banks  in  both  places  to  make  drafts 
balance  bills  in  order  to  avoid  sending  specie  in  payment. 
Hence  the  New  York  banks  will  seek  to  discourage  the  demand 
for  drafts  on  London  by  charging  a  higher  price  for  them,  and 
will  at  the  same  time  try  to  encourage  the  offering  of  bills  by 
paying  a  higher  price  for  them.  London  banks  will  in  the 
same  way  lower  the  price  offered  for  bills  on  New  York  and 
will  sell  more  cheaply  drafts  drawn  by  them  on  New  York. 
Exchange  is  then  said  to  be  "against"  New  York  and  "in 
favor  of  "  London.  A  New  Yorker  wishing  to  meet  a  debt  of 
£1  in  London  will  be  obliged  to  pay  for  the  necessary  draft 
more  than  $4.866.  He  will  have  to  pay  a  premium.  A  Lon- 


INTERNATIONAL   TRADE  233 

don  debtor  at  the  same  time  can  extinguish  a  debt  in  New 
York  by  the  payment  of  less  than  £1  for  each  $4.866  of  the 
debt. 

The  "Specie  Point."  —  Neither  New  York  nor  London 
bankers  will  charge  such  a  rate  for  drafts  or  pay  such  a  rate  for 
bills  as  will  make  it  profitable  for  individual  debtors  to  send 
the  specie  or  bullion  instead  of  appealing  to  the  banks.  But 
there  are  even  narrower  limits  to  fluctuations  in  the  rate  of 
exchange.  The  bankers  themselves  naturally  have  the  best 
facilities  for  making  shipments  of  money,  and  as  the  rate  of 
exchange  rises  or  falls,  a  point  is  reached  at  which  it  will  be 
more  profitable  for  the  banks  to  send  the  metal  in  settlement 
of  outstanding  balances.  This  point  is  called  the  "specie 
point."  As  the  bankers'  cost  of  shipment,  including  freight, 
insurance,  packing,  loss  of  interest,  etc.,  is  now  about  two 
cents  per  English  gold  pound  on  average  shipments,  the  specie 
points  in  English  American  exchange  stand  at  about  $4.846 
and  $4.886.  In  other  words,  gold  begins  to  go  out  from  New 
York  when  exchange  rises  above  $4.886,  and  begins  to  leave 
London  for  New  York  when  exchange  falls  below  $4.846. 

Again  we  must  remind  the  student  that  for  the  sake  of 
simplicity  we  have  assumed  trade  to  be  confined  to  the  two 
countries  mentioned.  When  the  case  of  international  trade  in 
general  is  taken  into  account,  the  subject  becomes  too  compli- 
cated for  brief  explanation.  We  may  simply  say  then  that 
the  rate  of  exchange  between  New  York  and  London,  London 
and  Paris,  Paris  and  Berlin,  etc.,  is  affected  not  only  by  the 
volume  and  balance  of  trade  between  the  two  countries,  but 
also  by  the  volume  and  direction  of  trade  balances  in  the  trade 
of  the  other  nations. 

The  Limit  to  Metal  Exportation.  —  There  is  also  another 
natural  limit  to  fluctuations  in  the  rate  of  exchange  and  to  the 
exportation  of  the  money  metal.  The  general  principle  may 
be  illustrated  by  supposing  the  case  of  two  nations,  neither  of 
which  possesses  mines.  Let  us  assume  again  that  their  trans- 
actions are  limited  to  the  mutual  purchase  and  sale  of  goods. 
What  happens  when  the  balance  of  trade  goes  for  a  time 


234       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

against  one  country  or  the  other  ?  The  rate  of  exchange  hav- 
ing reached  and  passed  the  specie  point,  gold  shipments  begin 
from  country  A,  the  country  of  large  imports,  to  country  B, 
the  country  of  large  exports.  Other  industrial  conditions  re- 
maining the  same,  A,  having  less  money  than  before,  will 
become  a  country  of  lower  general  prices ;  while  in  B,  with  its 
increased  stock  of  metal,  prices  will  rise.  What  results  ?  A 
at  once  becomes  a  stronger  seller  and  a  weaker  buyer ;  while 
B,  conversely,  becomes  a  stronger  buyer  and  a  weaker  seller. 
But  increased  importations  into  B  and  decreased  exportations  to 
A  will  readjust  the  trade  relations  to  their  old  position,  metal 
shipments  will  cease,  and  the  rate  of  exchange  will  again  ap- 
proach parity. 

The  actual  conditions  are  infinitely  more  complex.  Trade 
is  not  confined  to  two  nations ;  international  balances  depend 
upon  other  things  as  well  as  upon  the  transfers  of  goods ;  the 
currency  of  different  nations  is  not  in  all  cases  of  equal  stabil- 
ity or  honesty ;  many  nations  are  themselves  producers  and 
therefore  natural  exporters  of  gold.  Still  it  remains  true  that 
through  the  operation  of  such  natural  causes  as  we  have  just 
described,  the  various  debts  of  one  nation  to  the  world  and  the 
debts  of  the  world  to  that  nation  do  in  the  long  run  tend 
strongly  to  balance ;  and  the  money  metals  are  distributed 
among  the  nations  according  to  their  monetary  needs. 

International  Values.  —  The  values  at  which  goods  ex- 
change in  international  trade  depend  upon  the  same  funda- 
mental principles  that  have  been  explained  in  the  chapter  on 
value,  but  these  values  are  especially  influenced  by  the  fact 
that  labor  and  capital  do  not  usually  flow  so  freely  from  one 
country  to  another  as  they  do  between  different  parts  of  the 
same  country. 

Let  us  suppose  that  in  one  of  two  countries  just  beginning 
to  trade  with  each  other  it  is  found  that  the  greatest  satisfac- 
tion of  wants  results  when  raw  cotton  and  manufactured  silk 
are  produced  by  an  expenditure  of  labor  indicated  respectively 
by  15  cents  a  pound  and  50  cents  a  yard,  but  that  in  the  sec- 
ond country  it  is  just  worth  while  to  produce  the  same  com- 


INTERNATIONAL   TRADE  235 

modities  at  10  cents  a  pound  and  75  cents  a  yard  respectively. 
Assuming  these  to  be  the  only  two  commodities  to  be  exchanged 
and  ignoring  the  cost  of  transportation,  we  may  suppose  mat- 
ters to  proceed  as  follows :  Silk  will  be  sent  from  the  first 
country  to  the  second  in  exchange  for  cotton.  The  price  of 
the  silk  will  be  somewhere  between  50  and  75  cents ;  that  of 
the  cotton  between  10  and  15  cents.  The  precise  value  in  each 
case  will  be  such  that  in  the  long  run  the  values  of  the  cotton 
and  silk  exchanged  will  be  equal.  Suppose  it  were  not  so; 
imagine  that  $1,000,000  worth  of  silk  were  being  exported 
from  the  first  country  and  only  $500,000  worth  of  cotton  im- 
ported. At  first  the  balance  might  be  paid  in  gold,  but  the 
drain  of  gold  from  the  second  country  would  so  lower  prices 
there  as  to  discourage  the  further  importation  of  silk,  and  the 
influx  of  gold  into  the  first  country  would  so  raise  prices  as  to 
encourage  the  importation  of  cotton  into  that  country.  This 
would  continue  until  an  equilibrium  was  established. 

Even  if  one  country  had  greater  natural  advantages  for  the 
production  of  all  commodities,  trade  would  still  take  place 
between  the  nations,  since  the  first  country  could  satisfy  its 
wants  most  economically  by  confining  its  efforts  to  the  produc- 
tion of  goods  in  which  its  natural  advantages  gave  it  the 
greatest  superiority.  This  can  be  seen  also  in  the  case  of 
individuals.  If  a  man's  services  to  society  as  a  lawyer  are  so 
valuable  that  he  can  in  his  working  hours  earn  $10  an  hour, 
both  he  himself  and  society  will  suffer  if  he  spends  any  of 
his  time  in  doing  his  own  typewriting,  though  he  may  be  able 
to  do  the  work  more  rapidly  than  a  regular  typewriter  whom 
he  can  employ  for  $4  a  day.  Many  an  able  man  lessens  his 
efficiency  by  failing  to  observe  the  principle  here  indicated. 

The  Advantages  of  International  Trade.  —  By  an  old 
theory  of  a  "  favorable  balance  of  trade  "  it  was  held  that 
the  advantage  of  international  commerce  lay  in  securing 
an  excess  of  exports  over  imports,  that  the  balance  might 
be  paid  in  "  treasure,"  or  money.  This  idea  is  similar  to 


236        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

the  old  opinion  that  trade  between  two  individuals  could 
benefit  one  only  at  the  expense  of  the  other.  Now  it  is 
generally  seen  that  countries  can  sell  goods  only  by  buy- 
ing goods,  and  that  a  continuing  excess  of  exports  defeats 
itself  by  raising  prices  in  the  exporting  country.  The 
real  advantage  in  international  trade  is  that  (1)  it  enables 
every  country  to  enjoy  goods  which  it  does  not  itself  produce  ; 
and  (2)  enables  each  country  to  secure  a  maximum  of  satis- 
faction by  devoting  its  resources  and  energies  to  the  forms 
of  production  in  which  it  enjoys  the  greatest  relative 
advantages. 

II.   RESTRICTIONS  ON  INTERNATIONAL  TRADE 

Objects  of  the  Restriction.  —  Nations  have  always  laid 
restrictions  upon  international  commerce,  and  an  exami- 
nation of  the  history  of  such  restrictions  discloses  at  least 
four  motives  for  imposing  them.  (1)  In  the  first  place, 
we  may  note  that  ancient  nations,  the  Greeks,  the  He- 
brews, and  others,  dreaded  contact  with  foreigners,  and 
attempted  by  restrictions  on  international  trade  to  reduce 
such  contact  to  a  minimum.  (2)  A  second  very  common 
cause  of  restriction  has  been  the  desire  to  make  interna- 
tional trade  a  source  of  revenue.  Sometimes  a  tax  has  been 
laid  upon  both  exports  and  imports.  England  to-day 
taxes  only  imports,  and  taxes  these  with  a  view  to  secur- 
ing the  greatest  possible  revenue.  (3)  In  the  third  place, 
tariffs  have  at  times  been  laid  with  the  purpose  of  secur- 
ing a  supply  of  the  precious  metals,  through  a  so-called 
"favorable  balance  of  trade."  No  enlightened  nation  now 
pursues  this  course.  (4)  Finally,  many  nations  to-day 
regulate  international  commerce  with  the  object  of  weak- 
ening foreign  competition,  in  order  that  home  producers 


INTERNATIONAL   TBADE  237 

may  be  encouraged  and  supported.  Restriction  for  this 
purpose  usually  takes  the  form  of  laying  duties  upon  im- 
ported commodities  of  a  kind  that  can  be  produced  in 
the  home  country.  Such  taxes  are  called  protective. 
Collectively  they  form  what  is  called  a  protective  tariff. 
Home  producers  are  said  to  be  thus  "protected"  against 
foreign  competitors.  Of  course  in  some  cases  it  is  pos- 
sible that  more  than  one  or  even  all  of  the  objects  of 
regulation  that  have  been  mentioned  may  be  sought  by 
the  country  which  thus  regulates  its  commerce  with  other 
nations. 

Protectionism.  —  The  general  subject  of  protection  is  so 
vast  that  a  complete  discussion  of  it  would  fill  volumes. 
We  must  be  content  here  to  study  briefly  the  chief  points 
in  controversy  between  advocates  and  opponents  of  the 
system;  to  give  attention  to  certain  general  considera- 
tions of  importance ;  and  to  suggest  what  desirable 
changes  may  be  made  in  the  American  tariff  system 
upon  which  all  should  unite. 

Argument  of  Protectionists.  —  Protectionists  argue  that 
the  system  which  they  favor  promotes  nationalism,  or  a 
strong  sense  of  national  unity.  Domestic  trade,  they  say, 
should  be  encouraged  because  it  draws  the  citizens  of  a 
country  together,  while  international  trade  is  cosmopolitan 
and  tends  rather  to  the  separation  of  citizens  one  from 
another.  It  is  argued  that  nationality  and  a  strong  na- 
tional feeling  depend  upon  a  sense  of  national  strength 
and  independence,  which  can  exist  only  when  the  nation 
has  widely  diversified  industrial  interests,  and  therefore 
protective  duties  should  be  levied  to  encourage  such  a 
diversification  of  industry.  American  protectionists  insist 
that  in  a  new  country  there  exist  many  great  natural  ad- 


238        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

vantages  of  which  the  inhabitants  cannot  avail  themselves 
unless  they  are  protected,  at  least  temporarily,  from  the 
competition  of  foreign  producers  who  have  the  advantage 
of  long  experience.  The  (1)  diversified-natural-industry 
argument  and  the  (2)  protection-to-inf ant -industries  argu- 
ment —  the  ones  upon  which  protectionists  most  strongly 
insist — are  thus  seen  to  be  supplementary.  Protectionists 
urge  that  the  older  nations,  by  reason  of  their  acquired  skill 
and  capital,  can  destroy  in  their  infancy  any  new  pursuits 
that  a  younger  rival  is  seeking  to  establish.  Closely  con- 
nected with  this  argument  is  another  based  upon  (3)  mili- 
tary grounds.  Industrial  self-sufficiency  is  a  great  aid  to 
a  nation  in  times  of  war,  because  such  a  condition  lessens 
the  distress  due  to  naval  disasters.  Hence,  it  is  claimed 
that  nations  at  peace  should  prepare  for  war  by  protecting, 
nursing,  and  fostering  the  widest  possible  range  of  domes- 
tic industries.  (4)  The  home  market  is  also  claimed  to  be 
superior  because  more  secure  —  less  liable  to  the  shock  of 
war  or  international  complications.  (5)  Special  advantages 
are  said  by  the  protectionists  to  be  conferred  by  their  sys- 
tem upon  farmers,  who  are  saved  the  expense  of  long  ship- 
ment when  they  have  a  sufficient  market  for  their  crops 
among  home  manufacturers.  It  has  even  been  maintained 
by  one  American  protectionist  (6)  that  no  nation  can  be 
permanently  prosperous  unless  the  elements  taken  from 
the  soil  are  returned  to  it  in  the  form  of  manure  and  other 
fertilizers,  and  that  this  process  of  repair  is  possible  only 
when  agricultural  products  are  consumed  at  home.  An- 
other common  protectionist  argument,  which  has  been 
much  used  since  the  labor  movement  first  became  promi- 
nent, is  (7)  that  the  protective  tariff  has  been  the  cause 
of  high  wages  paid  to  American  labor,  and  that  it  will  be 


INTERNATIONAL   TRADE  239 

necessary  to  maintain  the  protective  tariff  if  we  would 
maintain  the  high  wages. 

Arguments  of  Advocates  of  Free  Trade.  — In  opposition 
to  protection  it  is  frequently  alleged  (1)  that  protective 
tariffs  are  a  violation  of  the  '•'•natural  right'1  of  every  man 
to  buy  and  sell  wherever  he  will,  untrammelled  by  human 
laws.  We  may  dismiss  this  "  natural-right "  argument  at 
once  as  "dogmatism  in  disguise."  It  is  a  question-beg- 
ging argument,  since,  in  the  use  of  the  word  "  natural,"  it 
assumes  the  very  thing  that  must  be  proved  before  the 
argument  can  have  weight.  All  history,  and  the  opin- 
ions of  all  great  modern  thinkers,  are  against  such  an 
assumption.  It  would  be  well  if  this  argument  were 
heard  more  rarely. 

Again,  (2)  it  has  been  claimed  that  protective  tariffs  in 
the  United  States  are  unconstitutional.  But  this  argument 
is  idle  and  futile.  The  opinions  of  our  best  jurists  have 
always  maintained  the  constitutionality  of  our  tariff  leg- 
islation, and  there  is  not  the  slightest  chance  that  the 
Supreme  Court  will  ever  pronounce  a  protective  tariff 
unconstitutional. 

The  really  cogent  arguments  of  the  advocates  of  a  tariff 
for  revenue  only  are  those  which  aim  to  show  that,  on  th^e 
one  hand,  the  protectionist  policy  either  fails  to  accomplish 
the  end  sought,  or  is  of  no  assistance  in  accomplishing  the 
desirable  object  which  it  contemplates;  and  that,  on  the 
other  hand,  it  actually  does  work  positive  injury  to 
national  interests. 

In  the  first  place,  (3)  they  claim  that  protection  is  not 
necessary  to  the  development  of  national  feeling.  In  proof 
of  their  claim,  they  point  to  the  fact  that  the  last  half- 
century,  which  has  witnessed  an  unprecedented  spread  of 


240        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

international  trade,  has  also  witnessed  a  wonderful  growth 
of  national  sentiment  throughout  the  world. 

The  free-traders  claim  also  (4)  that  protective  tariffs 
are  not  necessary  to  produce  diversity  of  industry,  particu- 
larly in  the  case  of  a  country  like  ours.  It  may  be  admitted 
that  a  purely  agricultural  nation  is  not  likely  to  progress 
rapidly ;  but  it  is  not  easy  to  understand  how  a  country 
so  vast  as  ours,  of  so  varied  a  climate,  of  boundless  natural 
resources,  can  be  anything  but  a  country  of  diversified  in- 
dustry, if  industry  itself  is  left  unhampered  by  burden- 
some restrictions  and  regulations. 

The  General  Influence  of  Protective  Tariffs.  —  The  free- 
traders insist  that  (5)  when  a  new  industry  is  started  in 
any  country  as  a  result  of  a  protective  tariff,  it  is  started  by 
withdrawing  or  withholding  the  necessary  capital  and  labor 
from  some  other  industry  which  would  naturally  be  more 
profitable,  and  that  therefore  every  such  new  industry  really 
means  a  decrease  in  the  productiveness  and  wealth  of  the 
country.  By  way  of  qualification,  most  free-traders  admit 
that  such  new  industries  may  attract  to  the  country  some 
foreign  capital  which  would  otherwise  be  invested  else- 
where, and  that  if  such  "  infant  industries  "  rapidly  reach 
a  condition  of  self-supporting  independence,  the  nation 
may  be  repaid  for  the  expense  incurred  in  hastening  the 
establishment  of  such  industries.  But  they  justly  protest 
against  applying  the  name  "  infant  industries "  to  busi- 
nesses that  have  received  tariff  protection  from  the  coun- 
try for  nearly  a  century.  Indeed,  (6)  the  fact  that  "infant 
industries"  have  thus  prolonged  the  period  of  their  in- 
fancy, and,  in  some  cases,  have  clamored  for  protection 
even  when  they  are  or  should  be  self-supporting,  furnishes 
one  of  the  strongest  arguments  against  a  policy  of  protec- 


INTERNATIONAL   TRADE  241 

tion.  If  they  do  not  become  self-supporting,  they  con- 
tinue to  hold  prices  up  beyond  a  reasonable  point ;  if  they 
do  become  able  to  withstand  competition,  but  still  have 
protection,  they  may  by  combining  maintain  a  higher  price 
than  open  competition  would  establish.  The  last  few 
years  have  shown  beyond  question  that  protection  favors 
monopoly  by  shutting  off  healthful  international  competi- 
tion. It  has  usually  been  claimed  by  protectionists  that 
the  competition  of  home  producers  would  suffice  to  keep 
prices  down.  Now,  however,  we  are  confronted  by  the 
obstinate  fact  that  in  the  case  of  a  number  of  protected 
industries,  combination  is  taking  the  place  of  competition ; 
and  home  producers  compete  at  low  prices  in  foreign  mar- 
kets, while  charging  their  countrymen  such  higher  prices 
as  protection  enables  them  to  exact. 

The  general  argument  of  the  free-traders  is  that  with 
nations  as  with  individuals  each  party  to  trade  will  regu- 
larly secure  the  greatest  advantage  if  the  trade  is  left  unre- 
stricted. Protection,  they  urge,  is  essentially  injurious,  in 
that  it  regularly  diverts  industry  from  channels  by  nature 
more  productive  to  others  by  nature  less  productive. 

Does  Protection  protect  Labor  ?  —  The  free-traders  main- 
tain (7)  that  the  argument  of  the  protectionists  that  a 
protective  policy  benefits  the  laborer  will  not  bear  close 
analysis.  For  nearly  two  centuries  before  any  protective 
tariff  existed  in  what  is  now  the  United  States,  the  high 
wages  of  American  laborers  had  been  repeatedly  noted 
and  explained.  Land  could  be  had  for  the  asking,  and 
laborers  would  not  consent  to  work  for  hire  unless  they 
could  receive  a  wage  high  enough  to  tempt  them  away 
from  independent  peasant  proprietorship.  The  same  con- 
dition has  existed  during  the  last  century,  and  almost 


242        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

down  to  the  present  day.  The  whole  question  of  the 
connection  between  the  tariff  and  wages  involves  a  dis- 
cussion of  many  complex  economic  problems.  It  must  be 
sufficient  here  to  suggest  a  single  important  consideration 
bearing  upon  this  question.  Labor  competes,  not  with 
commodities,  but  with  labor.  The  laborer  himself  wants 
commodities  and  the  more  of  them  he  can  secure  for  his 
labor  the  better.  In  other  words,  it  is  not  high  money 
wages  alone  but  high  wages  in  connection  with  low  prices 
that  indicates  national  welfare  and  prosperity.  If,  then, 
labor  is  to  be  protected,  a  tax  should  be  put  on  the  impor- 
tation of  labor  rather  than  upon  the  product  of  labor. 
Otherwise,  the  laborer  may  find  his  wages  lowered  by  the 
competition  of  a  multitude  of  imported  laborers,  while  he 
finds  the  cost  of  living  unduly  raised  by  the  protection 
which  has  been  granted  to  the  domestic  entrepreneur. 

General  Considerations.  —  Certain  general  considerations 
remain  to  be  suggested.  In  the  first  place,  the  importance 
of  this  whole  question  has  been  much  exaggerated.  Eng- 
land prospers  with  free  trade,  the  United  States  has  pros- 
pered under  protection.  How  far  England's  prosperity 
has  been  due  to  free  trade,  how  far  the  prosperity  of  the 
United  States  has  been  in  spite  of  protection,  we  cannot 
tell.  The  tariff  system  is  one  of  real,  but  not  of  vital, 
importance.  Moreover,  the  domestic  trade  of  the  United 
States  is  vastly  greater  and  more  important  than  her  for- 
eign trade.  Indeed,  the  domestic  trade  of  the  Mississippi 
valley  alone  is  far  greater  than  our  entire  foreign  com- 
merce. Evidently,  then,  we  can  thrive  as  we  have  thriven, 
under  protection,  since  by  far  the  greater  part  of  our 
trade  is  already  free  trade. 

In  the  second  place,  statistics  regarding  national  pros- 


INTERNATIONAL   TRADE  243 

perity,  as  they  are  usually  presented,  throw  little  light 
upon  the  question  one  way  or  the  other.  The  tariff  policy 
of  modern  countries  has  undoubtedly  been  a  minor  factor 
in  their  industrial  life.  Inventions  and  discoveries,  the 
spread  of  general  and  technical  education,  the  hopeful 
ambition  of  all  classes  of  our  people,  the  growth  of  intel- 
ligence, have  been  chief  among  the  forces  that  have  made 
such  astounding  additions  to  the  wealth  of  the  world  dur- 
ing the  past  century. 

In  the  third  place,  the  American  tariff  system,  bad  as 
it  undoubtedly  is  in  many  respects,  is  a  historical  growth 
that  has  taken  deep  root.  It  conditions  directly  or  indi- 
rectly a  great  part  of  our  industrial  life,  and  it  cannot 
therefore  be  suddenly  eradicated  with  impunity.  Yet  it 
is  impossible  to  tolerate  permanently  a  bad  condition  of 
things,  and  we  are  justified  in  demanding  that  there  shall  be 
progress  in  our  tariff  policy.  Even  selfish  considerations 
are  likely  to  lead  to  a  demand  for  revision  of  our  tariff 
schedules,  now  that  other  powerful  nations  are  retaliating 
or  threatening  to  retaliate  for  our  unneighborly  tariff  treat- 
ment of  them. 

SUMMARY 

1.  International  trade,  in  its  elements  a  trade  among  individuals  for 

money,  is  in  effect  trade  among  nations  of  goods  for  goods. 

2.  The  balance  of  trade  is  the  chief  element  in  determining  the  rate 

of  exchange. 

3.  International  values  are  influenced  by  the  fact  that  labor  and  capi- 

tal do  not  flow  from  country  to  country  so  readily  as  from  sec- 
tion to  section  of  the  same  country. 

4.  General  prices  and  the  national  money  supply  are  regulated  by 

trade  conditions. 

5.  Regulation  of  international  commerce  has  been  common  among 

all  civilized  nations. 


244        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

6.  Protection  is  defended  as  promoting  nationalism,  the  diversifica- 

tion of  industry  and  industrial  independence,  saving  costs  of 
transportation,  keeping  up  the  soil,  and  maintaining  high  wages. 

7.  It  is  attacked  as  being  unnecessary  to  the  development  of  industry, 

as  opposed  to  "  natural  rights,"  and  as  being  unconstitutional. 
It  is  further  claimed  that  it  regularly  and  naturally  diverts  labor 
and  capital  from  employment  that  would  be  more  productive  by 
nature  to  industries  in  which  the  employment  of  labor  and 
capital  is  naturally  less  productive. 

8.  Protection  often  fosters  and  protects  monopolies. 

9.  Our  tariff  system,  as  a  historical  growth,  must  be  modified  con- 

servatively and  carefully. 

QUESTIONS 

1.  What  are  the  advantages  of  international  trade  ? 

2.  How  is  the  rate  of  exchange  determined?     What  is  the  "specie 

point "  ? 

3.  What  relation  has  international  trade  to  the  distribution  of  money 

among  nations?     To  general  prices  in  different  countries? 

4.  What  is  protection?    Discuss  the  arguments  offered  in  its  sup- 

port.   In  opposition. 

5.  Why  have  American  wages  always  been  high  ?    What  bearing  has 

this  on  the  protectionist  argument? 

6.  What  objections  are  there  to  a  sudden  change  in  the  tariff  sys- 

tem?   How  many  laborers  are  affected  by  our  tariff  system  ? 

LITERATURE 
In  favor  of  protection :  — 
Carey,  H.  C. :  Manual  of  Social  Science. 
List,  F. :   National  System  of  Political  Economy,   Introduction,  and 

Bk.  II,  Ch.  XVI. 

Patten,  S. :  Economic  Basis  of  Protection. 
Thompson,  R.  E. :  Protection  to  Home  Industry,  and  Social  Science  and 

National  Economy. 
In  favor  of  a  revenue  tariff :  — 
Bastiat,  F. :  Sophisms  of  Protection. 
Perry,  A.  L. :  Principles  of  Political  Economy,  Ch.  VI. 
Sumner,  W.  G. :  Protectionism. 


INTERNATIONAL   TRADE  245 

Nearly  all  standard  economic  treatises  on  Economics  arrive  at  a 
conclusion  generally  opposed  to  protectionism;  but  in  England,  on 
account  of  the  efforts  to  draw  parts  of  the  empire  more  closely 
together  by  common  interests,  there  has  recently  been  a  reaction 
against  free  trade  which  has  strongly  influenced  a  few  English 
economists. 


PART  IV.  — DISTRIBUTION 

CHAPTER  I 
INTRODUCTORY 

The  Meaning  of  the  Word  "  Distribution." — Having  stud- 
ied under  the  head  of  consumption  the  human  wants  that 
lead  to  economic  activity,  and  the  satisfactions  that  result 
from  consumption  ;  having  studied  in  the  second  place 
the  production  of  goods  and  services  for  the  satisfaction 
of  human  wants  ;  and  having  in  the  third  place  studied 
the  subject  of  transfers  of  goods  and  services,  and  espe- 
cially of  their  exchange  among  producers  or  between  pro- 
ducers and  consumers,  we  come  now  to  a  study  of  the 
distribution  of  the  income  of  society,  especially  among 
the  factors  that  have  united  in  its  production.  Under 
the  heading  Distribution  we  might,  and  to  some  slight 
extent  shall,  consider  the  division  of  the  social  income 
among  individuals  ;  but  this  part  of  the  entire  subject  of 
distribution  is  so  vast  and  so  complex  that  we  cannot  in 
such  a  book  as  this  attempt  a  complete  treatment  of  it. 

There  is  one  sense  in  which  the  word  "  distribution"  is 
not  used  here.  We  shall  not  use  the  word  in  the  sense  of 
moving  goods  from  the  place  where  they  are  produced  to 
the  place  where  they  are  consumed.  When  we  speak  of 
railways  or  retail  stores  as  "distributive  agencies,"  we  are 

246 


INTROD  UCTOR  Y  247 

using  the  word  in  a  sense  wholly  different  from  that  of 
the  technical  term  which  describes  one  of  the  four  main 
divisions  of  economic  analysis. 

Before  passing  on  to  study  the  determination  of  the 
great  shares  of  the  annual  product  of  industry,  it  will  be 
well  for  us  to  pause  for  a  moment  to  consider  certain  gen- 
eral ideas  that  underlie  all  the  special  topics  which  are  to 
follow. 

Social  Wealth  and  Social  Income.  —  All  the  economic 
goods  that  society  has  for  use  at  any  time  constitute  the  social 
wealth.  The  satisfactions  that  flow  from  the  social  wealth 
and  services  during  any  period  of  time  constitute  the  social 
income  for  that  period.  Social  wealth  is,  therefore,  a 
fund  or  reservoir  from  which  issues  one  of  the  great 
streams  of  social  income,  the  other  proceeding  from  ser- 
vices. The  body  of  social  wealth  in  any  two  nations  may 
be  of  the  same  volume,  while  the  stream  of  social  satisfac- 
tions may  be  of  very  different  volume  in  the  two  cases  ; 
for  the  size  of  the  social  income  depends  not  alone  upon 
the  size  of  the  social  wealth,  but  also  upon  the  complete- 
ness with  which  that  social  wealth  is  utilized  and  upon  the 
services  rendered.  Well-being,  moreover,  is  increased  by 
the  satisfactions  flowing  from  the  use  of  free  goods,  and  is 
not  dependent  merely  on  income. 

Private  Income.  —  The  social  income  is  of  course  shared 
among  the  members  of  society.  That  part  of  the  social 
income  which  the  individual  enjoys  is  his  real  private  in- 
come. The  money  which  an  individual  receives  during  any 
period  of  time  constitutes  his  money  or  nominal  income.  It 
is  important  to  keep  this  distinction  in  mind,  since  equal- 
ity of  money  incomes  may  coexist  with  great  inequality 
of  real  incomes,  and  vice  versa.  Thus  it  is  a  commonplace 


248       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

to-day  that  city  laborers  regularly  receive  higher  money 
wages  than  the  same  classes  of  laborers  in  the  country. 
But  the  differences  in  cost  of  living  would  go  far  to  make 
the  real  incomes  of  the  two  classes  equal.  Again,  a  house 
occupied  by  its  owner  yields  a  real  income  to  him,  though 
this  does  not  enter  into  his  money  income  at  all. 

Private  Property.  —  Private  incomes  depend  upon  the 
institution  of  private  property.  Every  change  in  the  laws 
of  property  is  bound  to  change  to  some  extent  the  pro- 
duction and  exchange  of  goods,  and  hence  the  social 
income,  but  to  a  still  greater  extent  and  more  immedi- 
ately every  such  change  reacts  upon  the  distribution  of 
the  social  income  among  those  who  share  it.  The  impor- 
tance of  our  property  laws  is  therefore  evident.  These 
laws  have  sometimes  been  so  fixed  and  unchanging  that 
they  have  wrought  injustice  to  great  classes  of  people  ; 
e.g.,  the  laws  making  human  beings  private  property. 

Primary  and  Secondary  Processes  of  Distribution. — Under 
modern  industrial  conditions  there  are  two  regular  ways  in 
which  individuals  secure  their  share  of  the  social  income.  In 
the  first  place,  (1)  there  is  a  class  of  men  who  receive  their  in- 
comes directly  from  the  use  or  sale  of  the  product  which  they  make 
or  the  making  of  which  they  direct.  Thus  the  independent 
farmer  secures  his  income  from  the  produce  of  his  farm,  either 
by  consuming  it  directly  or  by  exchanging  all  or  part  of  it  for 
money  or  other  commodities.  So,  too,  the  professional  man 
regularly  receives  his  income  directly  from  the  sale  of  his  ser- 
vices. The  same  is  true  of  the  independent  entrepreneur.  His 
net  income  is  that  part  of  the  goods  produced  which  remains 
after  he  has  paid  the  necessary  expenses  of  the  business.  This 
process  of  distribution,  by  which  the  incomes  are  derived  directly 
from  the  use  or  sale  of  the  goods  or  services,  is  called  primary 
distribution;  the  resulting  incomes  are  called  primary  incomes. 


INTRODUCTORY  249 

But  the  greater  number  of  those  who  receive  regular  in- 
comes in  advanced  industrial  nations  secure  them  in  a  differ- 
ent way.  Hired  laborers,  capitalists  who  lend  their  capital 
to  others,  and  landlords  who  rent  their  farms  —  all  these 
classes  get  their  incomes  not  directly  from  the  consumption  or 
sale  of  the  product  of  industry,  but  (2)  through  contractual  rela- 
tions with  receivers  of  primary  incomes.  This  process  is  called 
secondary  distribution,  and  the  resulting  incomes  are  secondary 
incomes. 

A  Third  Process  of  Distribution. — Analysis  of  distribution 
might  be  carried  still  further  to  show  the  presence  of  a  third, 
or  (3)  tertiary,  form  of  distribution  and  incomes.  Minors,  who 
constitute  about  one-half  the  total  population  of  every  country, 
and  whom  the  parents  are  legally  bound  to  maintain,  and  the 
large  classes  of  delinquent  and  defective  persons  in  the  com- 
munity, receive  their  incomes  not  through  the  use  or  sale  of 
goods  or  services  produced  by  them,  nor  through  contractual 
relations  with  receivers  of  primary  incomes,  but  from  those 
who  do  receive  primary  or  secondary  incomes.  If  it  were  not 
for  this  distribution,  —  often  caritative,  as  it  rests  on  love  and 
benevolence,  —  the  competitive  system,  which  in  the  main 
dominates  our  industrial  life,  would  be  unendurable. 

The  Shares  and  Share  Receivers.  —  As  we  have  said, 
the  distribution  on  which  attention  will  be  centred  in 
the  following  pages  is  the  distribution  of  the  product  of 
industry  among  the  great  factors  that  have  united  to 
create  it.  The  factors  considered  in  the  study  of  produc- 
tion were  land,  labor,  and  capital ;  and  in  that  order  we 
shall  consider  the  distribution  of  the  product  among  them. 
The  shares  of  these  three  factors  are  known  as  rent,  wages, 
and  interest.  But  the  entrepreneur  —  he  who  secures  and 
directs  the  organization  of  the  factors  —  is  also  an  impor- 
tant share  receiver  in  modern  industry,  and  hence  we  shall 
study  the  principles  governing  his  share  of  the  product, 


250        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

called  profits.  Some  writers,  in  view  of  the  great  part 
played  in  all  production  by  the  State,  treat  separately  the 
share  received  by  the  State.  All  that  for  our  purposes 
needs  to  be  said  regarding  the  State's  share  in  the  prod- 
uct of  industry  will  be  presented  in  the  final  chapters  of 
the  book,  under  the  head  of  Public  Finance. 

Relation  of  Individuals  to  the  Four  Shares.  —  And  now 
just  a  word  as  to  the  relation  which  share  distribution 
bears  to  distribution  among  individuals.  Individuals  regu- 
larly receive  their  incomes  by  virtue  of  their  proprietary 
relation  to  one  or  more  of  the  factors  of  production. 
Thus,  when  we  are  discussing  the  share  of  the  annual 
produce  that  goes  to  land,  we  are  at  the  same  time  ex- 
plaining the  principles  which  determine  the  size  of  the 
rent  income  of  the  farmer  himself.  Similarly,  an  inquiry 
into  the  shares  received  by  capital,  labor,  and  entrepre- 
neurship  brings  us  more  or  less  closely  to  the  question  of 
the  income  of  the  individual  capitalist,  laborer,  or  entre- 
preneur. But  it  is  the  share  of  the  factor  as  a  factor  that 
we  shall  study  primarily,  noting  only  incidentally  the 
results  of  the  distribution  upon  the  income  of  individuals. 
The  importance  of  this  distinction  appears  when  we  reflect 
that  a  justification  of  the  share  of  industry  that  goes  to 
land  or  capital  is  not  a  justification  of  the  landlord's  or 
the  capitalist's  income,  unless  the  possession  of  the  land  or 
capital  is  also  justified. 

SUMMARY 

1.  Distribution  is  that  part  of  economics  which  deals  with  the  divi- 

sion of  the  social  income  among  individuals  and  classes,  and 
among  the  different  factors  of  production. 

2.  Our  modern  system  of  distribution  depends  directly  upon  our 

institution  of  private  property.     It  is  therefore  along  the  lines 


INTRODUCTORY  251 

of  changes  in  private  property  that  improvement  of  distribution 
is,  in  part,  likely  to  come. 

3.  Primary  incomes  are  derived  directly  from  the  product ;  secondary 

incomes  are  the  result  of  contract  relations  with  those  who  con- 
trol the  product;  tertiary  incomes  are  incomes  derived  from 
receivers  of  primary  and  secondary  incomes. 

4.  Private  income  is  the  individual's  share  of  the  social  income.     Real 

income  consists  of  commodities  and  services  which  the  individ- 
ual has  for  his  consumption.  Money  income  is  the  money 
received  by  an  individual  during  any  period  of  time. 

QUESTIONS 

1.  What  is  distribution?    What  problems  does  it  seek  to  solve? 

2.  What  is  the  relation  of  private  property  to  distribution  ?    How  is 

this  illustrated  in  the  case  of  land  ?    In  the  case  of  capital  ? 

3.  If  a  physician's  practice  is  worth  $10,000  a  year,  what  is  his  money 

income?  Mention  some  of  the  things  that  probably  go  to  make 
up  his  real  income. 

4.  What  other  persons  are  likely  to  enjoy  a  part  of  this  income? 

What  sort  of  an  income  is  that  which  falls  to  his  children  ?  Is 
the  physician's  income  primary  or  secondary  ?  Mention  differ- 
ent classes  of  incomes  that  you  are  familiar  with,  and  show 
whether  they  are  primary,  secondary,  or  tertiary. 

5.  What  is  the  primary  process  of  distribution?     The  secondary? 

The  tertiary?  Mention  examples  of  the  last.  What  is  private 
income  ?  How  does  it  differ  from  social  income? 

LITERATURE 
Mill,  J.  S. :  Political  Economy,  Bk.  II,  Ch.  II,  §§  1,  2,  and  3. 


CHAPTER  II 
RENT 

As  in  the  study  of  the  factors  of  production  we  first 
discussed  the  factor  land,  so  here  in  our  study  of  the 
distribution  of  the  social  income  among  the  factors  that 
contribute  to  its  production,  we  may  logically  begin  with 
a  discussion  of  the  return  to  the  first  factor. 

Meaning  of  the  Term.  —  As  used  by  economists,  the 
word  "  rent "  means  that  which  is  paid  for  the  use  of  land 
or  other  natural  agents.  The  popular  meaning  of  the 
word  "  rent "  is  less  exact.  In  everyday  life  we  hear  peo- 
ple use  the  word  to  describe  that  which  is  paid  for  the  use 
of  a  house  or  other  building.  But  such  so-called  rent  con- 
tains two  elements,  one  of  which  is  not  economic  rent  at 
all.  The  amount  paid  for  the  use  of  a  house  includes  the 
amount  paid  for  the  use  of  the  land  upon  which  the  house 
stands,  which  is  economic  rent ;  but  it  also  includes  pay- 
ment for  the  investment  of  capital  in  the  form  of  a  build- 
ing, and  this  latter  return  is  therefore  not  rent,  but 
interest.  The  reason  for  the  popular  confusion  lies  in 
the  fact  that  both  are  usually  paid  to  the  same  person. 
In  some  cities,  however,  separate  ownership  of  lot  and 
building  is  not  uncommon.  One  man  may  own  the  build- 
ing site  and  lease  it  for  a  long  term  of  years  to  another 
man  who  erects  a  building  upon  it.  In  such  a  case  the 
building  becomes  the  property  of  the  landowner  at  the 
expiration  of  the  lease,  unless  the  lease  is  renewed.  In 

252 


RENT  253 

other  cases  the  separation  in  ownership  is  permanent,  the 
houseowner  paying  an  annual  sum  to  the  landowner  for 
the  use  of  the  ground.  This  is  the  case,  for  example,  in 
Baltimore,  where  ground  rents  are  an  important  feature 
in  the  economic  life  of  the  city.  Let  us  remember,  then, 
that  in  economic  discussions,  the  word  "rent"  means  only 
that  which  is  paid  for  the  use  of  land  or  other  natural  agents. 
Inasmuch  as  land  is  the  chief  natural  agent  appropri- 
ated by  man  to  his  uses,  it  is  usual  to  speak  of  land  as  if 
it  were  the  only  natural  agent  for  which  rent  is  paid. 
It  is  therefore  necessary  to  caution  the  student  at  this 
point  that  when  the  word  "  land  "  is  used  in  the  following 
pages,  it  will  almost  always  be  possible  to  substitute  for 
it  the  more  general  term.  In  other  words,  the  same 
forces  which  determine  the  rent  of  land  determine  in  the 
main  the  rent  of  other  natural  agents. 

1.  The  Quality  of  the  Land. — The  first  thing  to  be 
noted  about  land  is  its  quality.  Differences  of  fertility 
of  agricultural  land  are  familiar  to  every  one.  They 
depend  upon  what  one  of  the  early  economists  described 
as  the  "natural  and  indestructible  properties  of  the  soil." 
In  recent  years  many  writers  have  objected  to  this  state- 
ment. It  has  been  said  by  way  of  denial  that  soil  is  not 
"indestructible";  that  it  may  be  and  often  is  exhausted; 
that  it  may  be  removed  from  the  land  altogether,  and  that 
on  the  other  hand  it  may  be  created  by  fertilization,  etc. 
The  disagreement  which  these  writers  express  is  due  in 
large  part  to  their  use  of  the  word  "  soil "  in  its  narrow 
sense.  If  we  use  the  word  "  soil "  only  to  distinguish  the 
thin  top  layer  of  the  land  that  contains  certain  chemical  ele- 
ments necessary  to  plant  life,  then  some  of  the  objections 
just  stated  are  valid  ones.  Such  "soil,"  as  distinguished 


254        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

from  subsoil  and  the  ground  lying  underneath,  may  indeed 
be  carted  on  or  off  the  land  at  pleasure  and  may  be  wasted 
or  replenished.  But  even  granting  this,  there  still  remain 
certain  qualities  of  the  land  that  are  practically  or  en- 
tirely indestructible  and  unproducible,  and  which  affect 
the  productiveness  of  the  land  so  directly  that  we  may 
without  impropriety  speak  of  them  as  "  properties  of  the 
soil."  Such  a  property  is  the  conformation  of  the  land. 
A  steep  gravelly  hillside  does  not  equal  a  plain  in  fertility, 
nor  is  the  north  side  of  a  mountain  as  productive  as  the 
south  side,  other  things  being  equal.  Again,  climate, 
although  strictly  speaking  not  a  "  property  of  the  soil," 
is  an  inseparable  condition  of  the  land,  upon  which  to  a 
very  great  degree  the  productiveness  of  the  land  depends. 
It  would  be  better  to  speak  of  these  forces  governing  the 
quality  of  the  land  as  the  inseparable  conditions  affecting 
its  productiveness.  Of  these,  extent  (standing  room), 
conformation,  and  climate  are  essentially  natural  and 
indestructible. 

As"  we  have  just  seen,  under  the  "  original  and  indestruc- 
tible qualities  of  the  soil,"  or,  to  use  the  phrase  suggested, 
the  inseparable  conditions  affecting  production,  we  must  in- 
clude the  general  physical  environment,  and  this  means  much 
more  than  many  modern  critics  have  recognized.  Concrete 
instances  will  aid  us  in  appreciating  the  significance  of  this 
environment.  In  the  western  part  of  New  York  State,  along 
the  shores  of  Lake  Erie,  we  find  a  region  which  is  admirably 
adapted  to  the  production  of  table  grapes.  This  is  due  in 
part  to  the  properties  of  the  soil  itself,  but  more  particularly 
is  it  due  to  the  presence  of  Lake  Erie,  which,  by  absorbing 
the  heat  in  the  springtime,  delays  the  appearance  of  vegeta- 
tion, and  by  giving  off  heat  in  the  fall  retards  the  action  of 
the  frost,  thus  giving  the  grapes  time  to  ripen.  If  we  go  to 


BENT  255 

Palisade  in  the  western  part  of  Colorado,  we  find  a  region 
so  admirably  adapted  to  the  production  of  peaches  that  some  of 
the  land  is  valued  at  $1000  per  acre.  This  is  due,  not  merely 
to  the  properties  of  the  soil,  but  also  to  the  peculiar  location  of 
the  region,  which  is  of  such  a  character  that  the  breezes  keep 
off  the  frost.  Land  thirty  miles  to  the  west,  which  is  appar- 
ently similar  in  quality,  will  not  produce  peaches  and  is  far 
less  valuable.  Careful  consideration  of  actual  agricultural  con- 
ditions leads  to  the  conclusion  that,  while  man  can  do  much  to 
create  fertility,  it  is  a  serious  error  not  to  attach  great  signifi- 
cance to  the  inseparable  conditions  affecting  the  productivity 
of  the  soil. 

While  it  is  true  that  the  soil  can  be  removed  and  that  fer- 
tility can  be  increased  or  decreased,  and  consequently  is  not 
indestructible  in  a  physical  sense,  we  may  speak  even  of  fer- 
tility as  economically  perpetual,  just  as  one  modern  economist 
has  called  "capital  value"  perpetual.  While  the  land  yields 
an  annual  return,  its  fertility  may  be  maintained  and  even 
increased  by  wise  husbandry.  It  is  only,  then,  by  a  wasteful 
and  prodigal  agriculture  that  the  original  gifts  of  nature  in 
the  fertility  of  the  soil  are  exhausted.  Similarly  the  value  of 
the  capital  invested  in  a  manufacturing  plant  is  maintained 
under  wise  management,  though  the  concrete  capital  forms  are 
undergoing  constant  destruction.  But,  as  it  is  easier  to  retain 
the  fertility  of  the  soil  in  perpetuity  and  to  increase  it  than  it 
is  to  maintain  and  increase  the  value  of  capital,  land  has  in 
this  particular  a  superiority. 

Fertility,  even  when  artificial,  becomes  essentially  a  part 
of  the  land.  The  farmer,  when  he  invests  his  capital  in 
fertilizers,  makes  a  contribution  which  becomes  indistin- 
guishable from  the  soil  itself.  From  such  a  case,  when 
capital  is  embodied  in  the  land  and  assimilated  to  it,  we 
pass  by  insensible  gradations  to  fences,  barns,  houses,  etc., 
which  more  and  more  retain  their  distinct  character  as 
removable  and  reproducible  capital.  Where,  then,  is  the 


256        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

line  between  land  and  capital  to  be  drawn  ?  We  might,  to 
be  sure,  restrict  the  term  "  land  "  to  strictly  natural  land, 
and  apply  the  term  "  capital "  to  all  products,  including  even 
the  soils  of  old  lands  which  have  been  kept  productive  by 
fertilization.  But  this  distinction,  while  perhaps  logical, 
would  for  practical  purposes  be  confusing.  On  the  other 
hand,  if  we  include  under  land  all  capital  that  has  been 
insensibly  incorporated  in  it,  we  must  acknowledge  that 
there  is  no  hard  and  fast  line  of  division  between  land  and 
capital.  Here  again  we  are  reminded  that  in  economics, 
as  in  everyday  life,  distinctions  are  governed  by  conven- 
ience, and  are  good  or  bad  according  as  they  are  more  or 
less  useful. 

The  distinctions  between  land  and  capital  are  now 
undergoing  discussion  and  may  be  regarded  as  debatable 
ground  in  economics.  We  cannot  enter  into  the  contro- 
versy in  this  place  or  give  all  the  reasons  why  it  seems 
to  us  that  the  differences  between  land  and  capital  are 
fundamental  in  their  theoretical  and  practical  signifi- 
cance. 

2.  The  Situation  of  the  Land.  —  The  second  great  fact 
to  be  noted  about  land  is  its  situation.  On  one  side  this 
is  closely  connected  with  climate.  Thus,  the  significance 
of  situation  near  a  large  body  of  water  or  near  a  mountain 
range  has  already  been  pointed  out.  But  the  situation  of 
land  with  regard  to  the  consumers  of  products  is  of  even 
greater  significance.  Other  things  equal,  land  a  hundred 
miles  from  market  is  more  valuable  than  land  a  thousand 
miles  from  market.  This  difference  is  really  one  of  com- 
munication and  transportation,  and  therefore,  of  accessi- 
bility, which  depends  mainly  upon  distance.  But  land 
may  be  far  away,  yet  easy  to  reach,  or  near,  yet  difficult  of 


SENT  257 

access.  Changes  in  the  cost  of  transportation  therefore 
affect  rents  profoundly.  Thus,  the  agricultural  rents  of 
England  have  been  revolutionized  during  the  last  cen- 
tury by  cheap  ocean  transportation,  which  has  practically 
brought  distant  lands  very  near  to  her  shores. 

To  this  fact  of  situation  we  must  ascribe  almost  wholly 
the  enormous  rents  paid  for  city  lots,  as  contrasted  with 
the  rents  paid  for  lots  in  suburban  places  or  in  small 
towns.  Here,  too,  rapid  and  easy  transport  powerfully 
affects  rents.  Good  means  of  rapid  transit  increase  the 
value  of  suburban  lots  and  check  the  rise  of  rents  for 
residence  sites  in  the  cities  themselves. 

And  now,  having  noticed  that  all  the  minor  economic 
differences  in  land  resolve  themselves  into  differences  of 
quality  or  of  situation,  we  may  go  one  step  farther  and 
reduce  these  two  differences,  for  the  purpose  of  conven- 
ience, to  one,  viz.,  desirability.  Suppose,  for  instance,  that 
a  man  in  New  York  City  owns  two  farms,  one  in  the  state 
of  Dakota,  the  other  in  his  own  state.  If  the  Dakota 
farm  produces  thirty  bushels  of  wheat  to  the  acre,  and  it 
costs  the  price  of  ten  bushels  per  acre  to  get  the  crop  to 
market,  while  the  New  York  farm  raises  twenty-two 
bushels  per  acre  and  it  costs  two  bushels  per  acre  to 
get  the  crop  to  market,  the  farms  are  equally  productive 
as  far  as  the  owner  is  concerned.  Other  conditions  being 
the  same,  the  two  pieces  of  land  are  equally  desirable. 
In  short,  we  may  say  that  they  are  equally  good  land. 
Whenever  we  speak  of  good  land  therefore  in  connec- 
tion with  the  subject  of  rent,  we  mean  land  which  for 
all  reasons  taken  together  is  desirable.  It  will  be  abso- 
lutely necessary  to  keep  this  in  mind  in  studying  the 
following  pages. 


258       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


RENT  OF  AGBICUI.TUEAL  LAND 

To-day  there  exist  large  areas  of  land  which  may  be 
had  for  nothing.  Of  this  land  some  is  cultivated  which 
pays  no  rent ;  some  is  not  cultivated  at  all.  Why,  then, 
is  it  that  some  land  will  bear  rent  under  such  circum- 
stances? Obviously,  because  that  land  is  more  desir- 
able than  the  land  which  may  be  had  for  nothing.  And 
how  much  rent  will  it  bear  ?  It  is  equally  obvious  that 
assuming  the  cultivators  to  be  of  equal  degrees  of  effi- 
ciency, the  rent  will  be  measured  by  the  difference  in 
desirability.  Let  us  illustrate  this  by  a  diagram. 


B 

i/   - 

0 

e/ 

D 

fr 

E 

0 

T       ^ 

—  7 
G          a' 

1 

h' 

Suppose  the  above  to  represent  all  land,  arranged  in  seven 
groups  according  to  desirability,  each  small  parallelogram 
representing  four  bushels  of  product  per  acre  in  excess  of 
the  amount  of  the  product  necessary  to  pay  for  marketing 
the  crop.  Then  the  first  group,  deducting  enough  of  the 
product  to  pay  for  transportation,  will  put  in  the  market 
28  bushels  of  wheat  per  acre;  the  second,  24;  the  others,  20, 
16,  12,  8,  and  4,  respectively.  Now  if  the  people  are  few 
and  need  a  small  part  of  the  land,  they  may  cultivate  only  A, 
or  the  most  desirable  land.  As  long  as  there  is  enough  of 


RENT  259 

this  land,  if  it  is  of  equal  desirability,  there  will  be  no  rent, 
for  no  man  will  pay  rent  for  what  he  can  get  for  nothing. 
But  the  time  may  come,  with  increasing  population,  when 
more  land  is  needed,  and  cultivation  is  driven  to  B.  Land 
is  still  free  there,  but  all  of  group  A  has  now  been  appro- 
priated. If,  then,  any  man  insists  upon  cultivating  land 
which  belongs  to  an  owner  in  group  A,  he  must  pay  for 
the  privilege.  How  much  must  he  pay  ?  Evidently  it  is 
4  bushels  per  acre,  since  in  group  A  he  can  produce  28 
bushels  per  acre,  while  in  group  B  he  can  produce  only  24 
bushels.  The  land  in  j?,  which  is  free  land,  is  now  the 
extensive  margin  of  cultivation ;  that  is,  the  grade  of  land 
which  will  just  pay  for  cultivation  and  no  more.  The 
normal  reward  to  labor  in  agriculture  is  the  total  return 
to  cultivation  on  this  margin  of  cultivation,  after  deduct- 
ing a  return  for  the  capital  invested  in  the  work.  The 
surplus  product  from  the  superior  land  —  in  other  words, 
the  advantage  which  owners  of  land  in  A  have  over  the 
tillers  of  the  free  land  —  is  rent.  And  it  is  rent  whether 
the  owners  of  the  land  in  A  work  the  land  themselves  or 
lease  it  to  others.  The  money  expression  of  the  rent  in 
this  case  is  the  market  price  of  the  4  bushels  of  wheat 
that  represent  the  differential  advantage  in  production 
possessed  by  workers  on  the  more  desirable  land. 

If  population  increases  still  further,  without  any  im- 
provement in  the  arts  of  production  or  of  consumption, 
the  margin  of  cultivation  will  in  time  descend  to  land  in 
group  (7,  where  the  number  of  bushels  produced  by  a  given 
amount  of  labor  and  capital  is  less  than  before.  Land  in 
B  will  now  return  a  rent  of  4  bushels  per  acre,  while  land 
in  group  A  will  return  a  rent  of  8  bushels  per  acre.  If 
the  margin  of  cultivation  is  later  forced  down  to  J£,  then 


260        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

rents  on  land  in  B  will  equal  one-half,  and  on  land  in  A 
will  equal  four-sevenths,  of  the  entire  product  of  such  land. 
Intensive  Cultivation.  — With  the  figure  in  mind,  let  us 
place  ourselves  again  at  the  point  where  all  the  A  land  is 
taken  and  men  are  beginning  to  seek  new  means  of  pro- 
duction. We  have  assumed  that  they  will  take  up  new 
land  in  group  B.  This  is  not  the  only  possibility,  how- 
ever. It  is  probable  that  land  in  A  may  be  made  to  pro- 
duce more  than  it  has,  if  the  amount  of  labor  and  capital 
expended  upon  it  is  increased.  In  other  words,  it  will  be 
possible  to  cultivate  the  old  land  more  intensively  at  a 
profit.  Suppose  that  ten  men  formerly  cultivated  100 
acres  of  A  land,  raising  2800  bushels  of  wheat,  and  that 
now  eleven  men  put  their  labor  upon  the  100  acres.  It 
may  be  that  the  100  acres  will  now  produce  3060  bushels, 
in  which  case  it  is  evident  that  the  labor  of  the  eleventh 
man  has  made  a  difference  of  260  bushels.  The  2800 
bushels  raised  by  the  ten  men  meant  280  bushels  of  crop 
per  man.  In  accordance  with  the  law  of  diminishing  re- 
turns, the  eleventh  man  does  not  increase  the  output  pro- 
portionately, but  he  is  still  producing  two  bushels  more 
than  he  would  if  he  were  to  work  on  the  B  land,  where  by 
our  assumption  ten  men  could  produce  only  2400  bush- 
els on  each  100  acres.  The  owner  will  give  such  a  laborer 
only  what  he  could  get  elsewhere,  on  the  B  land,  which 
would  be  240.  The  difference  between  the  240  bushels 
and  the  260  bushels,  the  owner  of  the  superior  land  takes 
for  himself.  Encouraged  by  this,  the  owner  thinks  of 
hiring  a  twelfth  man,  but  concludes  that  he  would  thus 
secure  a  crop  of  only  3280  bushels.  Hence  the  twelfth 
man  would  increase  the  output  by  only  220  bushels,  while 
he  would  have  to  be  paid  240  bushels,  the  amount  that  he 


SENT  261 

could  earn  by  working  free  land  in  group  B.  All  new 
laborers,  therefore,  in  excess  of  one  for  every  ten  of  the 
earlier  laborers,  would  find  it  more  profitable  to  put  their 
labor  upon  the  free  land.  Hence,  as  the  demand  for  agri- 
cultural produce  increases  relatively  to  the  supply,  new 
labor  and  capital  are  expended  upon  land  already  under 
cultivation  as  well  as  upon  land  not  before  used.  The 
rent  of  such  land  is  increased  by  the  surplus  yielded  by 
every  addition  of  labor  and  capital.  In  other  words, 
there  is  a  change  in  both  the  intensive  and  extensive  mar- 
gins of  cultivation.  With  every  increase  in  the  price  of 
produce,  and  with  every  fall  in  the  extensive  margin  of 
cultivation,  more  labor  may  be  employed  profitably  on 
land  already  cultivated.  Thus  the  landowner,  who  in 
the  case  last  supposed  could  not  afford  to  employ  a  twelfth 
laborer,  may  be  able  to  employ  thirteen  or  even  more 
when  the  extensive  margin  of  cultivation  has  fallen  to 
group  C  or  D. 

From  the  foregoing  it  is  clear  that  the  theory  of  rent  is 
based  upon  the  law  of  diminishing  returns,  which  has 
already  been  explained  in  a  previous  chapter.  It  is  evident 
that,  barring  improvements  in  the  arts  of  production  or  con- 
sumption, each  addition  to  the  number  of  mouths  which 
must  be  filled,  at  least  beyond  a  limited  number,  makes 
harder  the  task  of  drawing  sustenance  from  the  earth. 
But  we  know  that  improvements  have  hitherto  more  than 
kept  pace  with  increasing  population. 

RENT  OF  URBAN  LAND 

The  fact  that  situation  is  the  factor  of  special  impor- 
tance in  determining  the  desirability  of  urban  land  leads 


262        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

to  certain  peculiar  results  that  call  for  separate  discussion. 
We  may  consider  first  of  all  land  used  for  residential 
purposes.  Cities  have  sections  which  natural  beauty, 
heal thfuln ess,  convenience,  and  especially  fashion  have 
rendered  especially  desirable.  In  proportion  to  demand 
the  supply  is  sharply  limited,  and  this  brings  about  a 
keen  competition.  The  height  to  which  this  competition 
will  carry  rents  will  depend  upon  the  number  having 
large  wealth,  and  their  readiness  to  spend  money  for  what 
they  regard  as  desirable  sites  for  homes,  fashion  in  our 
cities  having  perhaps  more  to  do  with  intensity  of  desire 
than  anything  else.  Similar  considerations  will  affect 
the  height  to  which  rent  for  business  sites  will  rise.  The 
higher  the  average  of  well-being  and  the  more  ready 
people  are  to  spend  money,  the  higher  will  such  rents  go. 
Fashion  enters  here,  too,  particularly  in  the  retail  trade. 
If  people  spend  money  readily,  they  will  pay  appreciably 
more  for  an  article  in  a  convenient  locality  than  for  the 
same  article  in  a  slightly  less  convenient  situation.  This 
will  frequently  enable  those  doing  business  in  desirable 
locations  to  secure  higher  prices  with  a  larger  number  of 
sales,  or  to  increase  still  further  the  number  of  sales  by 
keeping  the  same  price  which  competitors  less  desirably 
situated  ask.  Intensity  of  traffic  is  an  important  consider- 
ation in  determining  the  rent,  and  consequently  the  value, 
of  retail  business  property.  We  must  also  take  into  ac- 
count the  quality  of  the  people  who  make  up  this  traffic, 
the  rent  depending  upon  both  numbers  and  quality.  In 
some  cases  a  high  degree  of  intensity  may  counterbalance 
a  lack  of  fashion,  or  even  more  than  counterbalance  it,  so 
that  retail  business  property  in  a  neighborhood  which  is 
not  fashionable  may,  on  account  of  the  intensity  of  traffic, 


BENT  263 

have  a  higher  rent  than  retail  business  property  in  a  fash- 
ionable locality  with  comparatively  little  traffic.  The 
influence  of  fashion,  however,  can  be  seen  in  a  very 
marked  manner  in  a  city  like  New  York,  where  large 
numbers  of  rich  people  would  on  no  account  make  pur- 
chases on  an  "  unfashionable "  street.  The  result  is  a 
large  surplus  gain  secured  by  business  sites  favorably 
located.  Competition  transfers  to  the  landowners  this 
surplus  due  to  location.  This  explains  what  has  puzzled 
so  many,  namely,  the  high  rents  in  American  cities  as 
contrasted  with  European  cities.  Our  cities  are  spacious, 
but  other  considerations  than  space  govern  rents. 

Reflection  will  show  that  where  the  two  elements  of  a 
high  degree  of  scarcity  and  desirability  enter  into  the 
location  of  land  on  the  seashore  or  in  summer  resorts  on 
the  mountains,  similar  causes  will  give  high  rent.  On 
the  other  hand,  it  is  commonly  a  matter  of  unconcern 
where  the  potatoes  and  beef  we  eat  are  produced,  and 
the  result  is  that  agricultural  rents  are  less  governed  by 
situation,  transportation  being  the  chief  consideration  in 
this  particular. 

The  Relation  of  Rent  to  Value  of  Product.  —  It  is  often 
said  that  rent  has  no  influence  on  the  value  of  the  product, 
rent  differing  herein  from  wages  and  interest,  which  are  said 
to  determine  price.  This  at  first  sight  seems  paradoxical,  in- 
asmuch as  the  tenant  must  pay  rent  to  the  landowner  as  well 
as  interest  to  the  capitalist  and  wages  to  his  laborers.  The 
paradox  is  explained  by  saying  that  prices  are  fixed  by  the 
expenses  of  production  on  the  poorest  land,  where  wages  and 
interest  are  paid,  but  no  rent.  Hence  the  rent  that  is  paid  for 
the  better  land  is  the  result  of  the  price  fixed  in  this  way  and 
not  a  cause  of  it. 

This  doctrine  is  true  in  the  main,  but  requires  limitations. 


ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

To  the  extent  that  land  is  indestructible  and  does  not  require 
any  payment  to  keep  its  services  in  production,  it  is  correct 
to  say  that  rent  does  not  enter  into  price.  On  the  other  hand, 
to  the  extent  that  labor  and  capital  require  a  remuneration  to 
keep  them  from  perishing,  wages  and  interest  clearly  do  enter 
into  price.  But  so  far  as  regards  the  payments  which  are 
necessary  to  keep  up  the  fertility  of  the  land,  and  so  far  as 
regards  the  surplus  above  maintenance  which  labor  and  capital 
receive,  the  statement  is  not  true. 

The  Relation  of  Rent  to  the  Value  of  Land.  —  The  value 
of  land,  however,  is  determined  by  its  rent.  The  value 
of  the  product  determines  rent,  and  rent  in  turn  determines 
the  value  of  the  natural  agent.  If  any  piece  of  land  is 
so  much  more  desirable  than  the  poorest  piece  of  land  in 
cultivation  that  it  will  return  a  rent  of  $5  per  acre,  and 
if  at  the  same  time  and  place  capital  regularly  commands 
5  per  cent  interest,  then  the  owners  of  the  land  and  others 
will  regard  each  acre  of  this  land  as  equal  in  value  to  an 
amount  of  capital  that  returns  $5  per  year,  or  $100.  Hence 
we  may  say  that  the  value  of  land  is  its  rent  capitalized  at 
the  current  rate  of  interest. 

Definitions  of  Rent.  —  We  are  now  prepared  to  define 
rent  more  accurately  and  completely  than  was  possible 
before,  and  to  see  that  different  definitions  which  may  be 
given  really  describe  the  thing  from  different  points  of 
view.  Thus  the  definition  "  rent  is  that  which  is  paid  for 
the  use  of  land  or  other  natural  agents,"  conveys  no  idea 
of  the  power  by  which  it  is  secured  nor  of  the  way  in 
which  its  amount  is  determined.  Hence,  we  may  add  the 
following  definition :  Rent  is  the  amount  produced  by  land 
or  other  natural  agents  in  excess  of  a  normal  return  to  the 
labor  and  capital  devoted  to  its  cultivation.  In  this  defini- 


BENT  265 

tion,  however,  there  is  no  direct  indication  of  those  differ- 
ences in  desirability  from  which  rent  arises.  We  may, 
therefore,  give  as  our  final  definition,  the  following :  Rent 
is  a  differential  return  received  by  the  owners  of  superior 
natural  agents,  the  amount  being  determined  by  the  extent  to 
which  the  given  natural  agent  or  the  given  use  of  the  agent 
surpasses  in  productiveness  the  poorest  natural  agent  of  the 
same  sort  or  the  least  profitable  use  of  such  a  natural  agent 
that  society  requires  to  satisfy  its  need  for  the  product. 
In  all  this,  we  have  assumed  that  cultivators  are  of  equal 
efficiency.  Differences  of  product  due,  not  to  differ- 
ences in  the  natural  agent,  but  to  differences  in  the 
ability  of  those  who  use  the  natural  agent,  do  not  re- 
quire explanation  at  this  point. 

SUMMARY 

1.  Rent  is  the  return  paid  for  the  use  of  a  natural  agent,  and  is  equal 

to  that  part  of  the  product  of  the  natural  agent  which  is  in 
excess  of  the  product  of  the  poorest  agent  of  the  same  sort  that 
is  cultivated. 

2.  So  long  as  land  exists  in  excess  of  all  demand,  rent  is  determined 

by  the  excess  of  product  over  that  of  the  poorest  free  land. 

3.  When  land  is  all  taken,  and  all  is  cultivated  that  will  repay  cost, 

rent  is  determined  by  the  excess  of  product  over  the  necessities 
of  laborers,  —  as  determined  by  the  law  of  wages,  —  and  the 
necessary  reward  to  the  capital  invested  in  cultivation. 

4.  Increased  demand  for  the  products  of  the  soil  regularly  results  in 

the  cultivation  of  more  land  (extensive  cultivation)  and  in  the 
application  of  more  labor  and  capital  to  that  already  in  culti- 
vation (intensive  cultivation). 

5.  In  a  given  stage  of  the  arts  of  production  a  point  is  reached  in  the 

application  of  economic  energy  to  any  natural  agent,  beyond 
which  the  return  to  further  applications  of  energy  is  proportion- 
ately less.  (The  Law  of  Diminishing  Returns.) 


266        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

6.  Special  importance  attaches  to  situation  in  the  determination  of 

urban  rents. 

7.  The  value  of  any  natural  agent  is  determined  by  its  rent  capital- 

ized at  the  current  rate  of  interest  on  free  capital. 

QUESTIONS 

1.  On  what  is  rent  based?    Why  would  rent  disappear  if  land  were 

unlimited  in  amount  and  all  of  equal  quality  ? 

2.  Discuss  the  differences  in  desirability  of  land. 

3.  How  is  the  amount  of  rent  determined  when  free  land  exists  ? 

4.  What  is  the  extensive   margin  of  cultivation?    The   intensive? 

What  is  intensive  cultivation?  What  determines  how  far  in- 
tensive cultivation  may  profitably  be  carried  ?  State  the  law  of 
diminishing  returns.  Show  how  it  applies  to  land  used  for 
manufacturing.  For  commercial  buildings.  For  city  residences. 

5.  What  effect  does  a  lowering  of  the  margin  of  cultivation  have  upon 

rent?    Why? 

6.  What  is  the  effect  of  improvements  in  the  arts   of   production? 

Of  consumption?  Of  transportation  ?  What  are  the  forces  in 
society  that  tend  to  raise  agricultural  rents  ?  Urban  rents  ? 

7.  Why  does  not  rent  determine  price  ? 

8.  How  is  the  value  of  any  natural  agent  measured? 

LITERATURE 

Clark,  J.  B. :  Distribution  of  Wealth,  Ch.  XIII,  pp.  188-193. 
Commons,  J.  R. :  The  Distribution  of  Wealth,  Ch.  Ill,  pp.  159-170. 
George,  Henry :  Progress  and  Poverty,  Bk.  Ill,  Ch.  II  (seven  pages). 
Hobson,  J.  A. :  The  Economics  of  Distribution,  Ch.  IV,  §§  1  and  2. 
Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  II,  Ch.  XVI,  §§  2  and  3. 
Patten,  S.  N. :  Dynamic  Economics,  pp.  144-147. 
Taylor,  H.  C. :  "  The  Differential  Rent  of  Farm  Land,"  Quarterly  Journal 

of  Economics,  August,  1903,  Vol.  XVII,  p.  598. 
Walker,  F.  A. :  Land  and  its  Rent. 


CHAPTER   III 

WAGES  AND  THE  LABOR  PROBLEM 
I.   How  WAGES  ARE  DETERMINED 

WE  have  pointed  out  that  of  the  factors  of  production, 
land  and  labor  are  the  primary  and  original  ones.  Hav- 
ing discussed  rent,  or  the  portion  of  the  product  allotted 
to  the  owners  of  land,  we  may  next  properly  consider 
wages,  the  portion  allotted  to  labor.  First  of  all,  it  is 
to  be  noted  that  in  the  study  of  wages  there  are  really 
two  distinct  problems  to  be  investigated.  What  share  of 
the  total  produce  of  industry  goes  to  labor  ?  This  is  the 
problem  of  general  wages.  But  having  answered  this 
question,  we  shall  still  have  to  ask  ourselves  why  some 
classes  of  laborers  receive  greater  incomes  than  others  ; 
why  glass-blowing,  for  instance,  is  paid  for  by  a  higher 
rate  of  wages  than  is  ditch-digging,  and  so  on  ?  This 
second  problem  is  called  the  problem  of  relative  wages. 
We  shall  discuss  the  two  problems  separately  as  we  have 
here  stated  them. 

1.  G-eneral  Wages. — It  follows  from  our  discussion  of 
the  determination  of  value  that  if  wage-earners  were  in 
excess  of  all  demand  for  their  labor,  such  labor  would 
have  no  value  ;  wages  would  be  nothing.  On  the  other 
hand,  if  laborers  were  few  and  in  great  demand,  only  the 
more  intense  wants  for  labor  could  be  satisfied,  and  wages, 
or  the  value  of  labor,  would  be  very  high.  It  is  evident, 

267 


268       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

then,  that  wages,  the  value  of  labor,  depend  primarily 
upon  two  things :  the  number  of  wage-earners,  and  the 
demand  for  their  labor.  In  other  words,  wages  depend 
upon  the  relation  between  the  supply  of  labor  and  the 
demand  for  it.  But  this  statement  is  too  general  to  be 
of  great  use.  We  must  therefore  consider  further  the 
forces  that  determine  the  supply  and  the  demand. 

The  Number  of  Wage-earners.  —  We  have  already  dis- 
cussed the  tendency  of  the  human  race  to  multiply. 
Beyond  all  doubt  the  desire  for  marriage  and  family  is 
one  of  the  strongest  and  most  universal  of  human  desires. 
But  over  against  this  desire  stand  many  others  —  desires 
for  food,  clothing,  and  a  multitude  of  other  things  which 
are  of  course  arranged  and  satisfied  in  the  order  of 
their  economic  importance.  No  man  intentionally  satisfies 
weaker  desires  at  the  expense  of  stronger  ones.  In  the 
whole  list  of  desires,  that  for  marriage  must  take  its 
place  according  to  its  importance.  The  rank  of  this 
desire  varies  with  individuals  and  classes.  Some  regard 
education,  books,  art,  or  even  a  substantial  bank  account 
as  more  important  than  marriage  in  their  scale  of  desires. 
The  amount  of  necessaries,  comforts,  and  luxuries  which  any 
person  or  class  is  accustomed  to  enjoy  and  to  insist  upon 
having,  is  the  "  standard  of  life,"  or  the  "  standard  of  com- 
fort," of  that  person  or  class.  This  standard  of  life, 
though  incapable  of  precise  definition,  is  a  very  real  and 
powerful  force  in  the  determination  of  wages.  When- 
ever wages  tend  to  fall  below  the  point  at  which  the 
workman  can  maintain  his  standard  of  life  for  a  family, 
many  workmen  will  do  without  the  family,  and  will 
attempt  to  maintain  the  standard  of  life  for  themselves 
alone.  This  force  operates  upon  both  men  and  women 


WAGES  AND  THE  LABOR  PROBLEM      269 

to  prevent  or  postpone  marriage,  and  to  diminish  the 
number  of  children  born.  The  higher  is  the  standard  of 
life,  the  greater  is  the  persistence  shown  in  maintaining  it. 
Those  whose  standard  is  very  low  are  often  heedless  or 
hopeless  when  that  standard  is  threatened  ;  while  those 
who  have  attained  a  high  standard  display  marked  cau- 
tion in  delaying  marriage  until  their  income  will  justify 
such  a  course.  It  is  plain,  then,  that  the  standard  of  life 
constantly  limits  the  number  of  wage-earners,  and  hence 
tends  to  maintain  or  even  to  increase  the  value  of  labor. 

The  Economy  of  High  Wages.  —  In  what  has  just  been 
said  we  have  simply  noted  the  influence  of  the  standard 
of  life  upon  the  number  of  laborers  in  the  labor  market. 
But  the  result  is  equally  striking  when  we  come  to  con- 
sider the  influence  of  the  standard  upon  the  efficiency  of 
labor.  Even  from  the  standpoint  of  employers  as  a  class, 
the  policy  of  depressing  the  laborer's  standard  of  life 
stands  condemned.  Labor,  to  attain  its  highest  efficiency, 
must  have  character  and  intelligence  as  well  as  mere 
brawn.  More  and  more,  business  men  are  coming  to 
learn  the  "economy  of  high  wages,"  and  that  "cheap 
labor  is  dear  labor."  Especially  is  this  true  at  the  pres- 
ent time  when  industry  is  becoming  more  and  more  di- 
vided into  the  two  classes  of  machine  industry  and  hand 
industry.  American  labor  is  in  many  industries  the 
cheapest  labor  in  the  world  because  it  is  the  best  paid. 
High  wages  make  possible  a  high  standard  of  life.  The 
high  standard  of  life  makes  the  labor  intelligent,  hopeful, 
and  full  of  character,  as  well  as  more  efficient  physically. 
And  the  increased  efficiency  makes  possible  the  higher 
wages.  Thus  by  action  and  reaction  the  standard  of  life 
is  both  a  cause  and  a  result  of  the  wages  received. 


270        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

The  Demand  for  Labor.  —  In  what  has  gone  before,  we 
have  considered  especially  some  of  the  forces  that  operate 
to  control  the  supply  of  labor  in  the  labor  market.  In 
other  words,  we  have  been  considering  the  problem  of 
wages  chiefly  from  the  standpoint  of  supply  of  labor.  It 
remains  for  us  to  see  how  far  we  can  explain  wages  from 
the  standpoint  of  demand.  Manifestly,  under  our  present 
industrial  system,  capital  will  not  be  saved  nor  businesses 
conducted  unless  those  who  save  the  capital  and  those 
who  conduct  the  businesses  receive  a  reward  for  their 
contribution  to  production.  If  the  laborers  in  seeking 
higher  wages  enforce  demands  that  would  rob  the  capital- 
ist of  the  interest  that  is  his  due,  or  the  entrepreneur  of 
the  profits  that  secure  his  services,  then  shortly  the  capital 
will  cease  to  be  saved  and  the  unprofitable  businesses  will 
be  discontinued.  It  is  evident,  therefore,  that  the  demand 
for  labor  has  an  upper  limit  in  the  value  to  society  of  the 
product  of  the  labor.  By  unjust  laws,  by  inequitable  con- 
ditions, the  employers  may  be  able  to  secure  labor  for  less 
than  the  laborer  contributes  to  the  value  of  the  product, 
but  it  is  not  easily  conceivable  that  under  present  condi- 
tions of  industry  the  labor  can  for  long  get  more  than  it 
actually  produces. 

Summary  of  Theory  of  General  Wages.  —  Summing  up 
now  what  has  been  explained  at  length,  we  may  say  that 
waff es  depend  upon  the  relation  between  the  supply  of  labor 
and  the  demand  for  it.  The  supply  of  labor,  and  hence  the 
lower  limit  of  wages,  is  fixed  with  some  sharpness  by  the 
standard  of  life  of  the  laborers.  But  as  this  force  operates 
slowly,  it  may  in  extreme  cases  happen  that  the  only  lower 
limit  to  wages  is  the  amount  which  will  enable  the  laborers  to 
live.  In  earlier  days  some  of  the  economists  seemed  to 


WAGES  AND  THE  LABOR  PROBLEM      271 

think  that  wages  would  normally  and  in  the  long  run  rest 
at  this  point  of  bare  subsistence,  and  the  law  of  wages 
which  they  formulated  was  therefore  called,  from  its 
rigidity  and  its  harshness,  the  "iron  law  of  wages."  On 
the  side  of  demand,  we  can  only  say  that  there  is  an  upper 
limit,  fixed  by  the  value  of  the  laborer's  contribution  to  the 
product,  beyond  which  wages  cannot  normally  go,  since 
the  demand  for  labor  cannot  be  measured  at  a  higher 
price  than  the  price  of  what  it  produces.  Consequently 
the  demand  for  labor  may  result  in  giving  to  the  laborer 
in  wages  the  whole  of  the  product  of  industry  after 
deducting  rent  and  such  minimum  interest  and  profits  as 
are  fixed  by  laws  to  be  explained  later.  Between  the  lower 
limit,  set  by  the  standard  of  subsistence  or  by  the  standard 
of  life,  and  the  upper  limit,  set  by  the  value  of  the  laborer's 
contribution  to  product,  wages  will  fluctuate  according  to  the 
relative  bargaining  strength  of  the  two  parties  to  the  wage 
contract. 

2.  Relative  Wages.  —  Coming  now  to  the  problem  of 
relative  wages,  to  the  question  why  some  classes  of  work 
are  paid  for  at  a  higher  rate  than  others,  it  is  evident  first 
of  all  that  the  pay  of  laborers  in  any  class  of  employment 
depends  upon  the  relation  between  the  demand  for  such 
laborers  and  the  supply  of  such  labor,  and  upon  the  rela- 
tive bargaining  strength  of  those  in  each  group.  Thus 
far  the  considerations  already  discussed  bear  upon  relative 
wages  as  upon  general  wages.  But  in  the  discussion  of 
relative  wages,  there  are  certain  special  considerations  to 
be  borne  in  mind.  Differences  in  relative  wages  are  set- 
tled in  the  great  majority  of  cases  by  past  conditions.  To 
understand  them  we  must  go  back  to  a  man's  father  or 
grandfather.  Occupations  where  remuneration  is  high 


272       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

are  usually  so  difficult  to  enter  that  few  are  able  to  sur- 
mount the  difficulties.  Thus  peculiar  and  rare  qualities 
may  be  required,  or  an  expensive  training  which  few 
parents  are  at  once  able  and  willing  to  give. 

While  the  various  sorts  of  labor  are  almost  infinite  in 
number,  they  are  nevertheless  susceptible  of  a  fairly  dis- 
tinct classification.  These  classes  have  commonly  been 
called  "  non-competing  groups."  Perhaps  the  best  nam- 
ing of  these  is  that  made  by  Professor  Giddings  as 
follows :  automatic  manual,  responsible  manual,  automatic 
mental,  responsible  mental.  The  words  should  explain 
sufficiently  the  different  groups  represented  by  them. 
Between  any  two  groups  very  little  competition  is  at 
any  given  time  possible.  What  competition  there  is,  is 
a  matter  of  years,  resulting,  as  it  must,  from  the  action 
of  parents  in  preparing  their  children  for  entering  one  or 
the  other  of  the  groups. 

The  Influence  of  Public  Schools.  —  A  good  system  of 
public  education  continually  increases  the  amount  of  free- 
dom in  the  choice  of  occupations.  Education  gives  greater 
knowledge  regarding  the  advantages  and  requirements  of 
different  occupations  at  the  same  time  that  it  puts  its  pos- 
sessor in  a  position  where  he  can  more  readily  realize  the 
one  and  meet  the  other.  It  therefore  tends  to  lessen  the 
competition  for  the  lowest  grades  of  employment,  thus 
raising  the  wages  there ;  while  it  tends  to  lower  the  wages 
in  the  higher  grades  by  making  the  competition  for  such 
employment  more  keen. 

Adam  Smith  enumerated  the  following  five  causes  for 
differences  of  wages  in  different  employments :  first,  their 
agreeableness  or  disaareeableness ;  second,  the  ease  or  diffi- 
culty of  learning  them  ;  third,  the  regularity  of  employment ; 


WAGES  AND   THE  LABOR  PROBLEM  273 

fourth,  the  need  of  trustworthiness  in  the  workman ;  fifth, 
the  probability  of  success.  Although  this  summary  of 
determining  conditions  assumes  an  unreal  freedom  of  com- 
petition among  workmen  to  secure  the  greatest  net  advan- 
tage from  their  employment,  it  nevertheless  is  suggestive 
and  helpful  in  explaining  actual  differences  in  relative 
wages.  It  will  be  a  good  exercise  for  the  student  to  apply 
to  existing  occupations  Adam  Smith's  statement  of  the 
causes  of  differences  in  wages. 

II.   LABOR  ORGANIZATIONS 

Wages  have  been  shown  to  be  largely  dependent  upon 
the  relative  bargaining  strength  of  the  laborers  as  com- 
pared with  that  of  entrepreneurs  and  others  who  con- 
tribute to  the  work  of  production.  The  same  thing  could 
be  shown  to  be  true  also  of  the  other  conditions  of 
employment  which  enter  into  the  wage  contract.  Such 
being  the  case,  it  is  natural  that  under  our  modern  wage- 
system  laborers  have  sought  to  increase  their  bargaining 
strength  by  every  means  in  their  power.  One  of  the  most 
evident  means  is  that  of  uniting  their  strength  in  labor 
organizations.  By  such  organization  labor  is  enabled  to 
substitute  "  collective  bargaining  "  for  the  individual  bar- 
gaining under  which  the  workman  is  at  a  manifest  and 
great  disadvantage.  Labor  organizations,  then,  are  more 
or  less  permanent  combinations  of  laborers  formed  to  in- 
crease their  power  of  determining  the  conditions  of  employ- 
ment. 

Origin.  —  The  old  mediaeval  gilds  were  organizations 
that  controlled  all  the  factors  of  production.  Employers 
and  employed  united  in  a  single  body  to  regulate  pro- 
duction, but  the  control  rested  chiefly  with  the  masters. 


274       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Modern  labor  organizations,  on  the  other  hand,  are  the 
result  of  our  capitalistic  system  of  production,  and  date 
only  from  the  eighteenth  century.  They  embrace,  as  a 
rule,  only  employees,  and  the  purpose  is  to  promote  the 
interests  of  the  laboring  class  whenever  those  interests 
clash  with  those  of  the  employers.  It  is  the  sharp  separa- 
tion of  classes  characteristic  of  modern  industry  that  has 
made  labor  organization  natural  and  necessary. 

Two  Forms  of  Organization.  —  Labor  organizations  may 
be  divided  into  two  classes,  and  as  a  matter  of  fact  are  so 
divided  to-day  in  the  United  States  and  England.  The 
trade-unions  in  the  United  States  now  allied  in  the  Ameri- 
can Federation  of  Labor  and  the  "old"  trade-unions  of 
England  are  primarily  unions  of  skilled  artisans  of  dis- 
tinct crafts.  According  to  the  old  trade-union  idea,  each 
craft  should  be  organized  by  itself.  The  Knights  of 
Labor  in  the  United  States,  on  the  other  hand,  and  in 
England  the  "new"  trades-unions  are  organizations  of 
the  laborers  in  general,  skilled  and  unskilled.  They  aim 
to  break  down  the  barriers  to  common  action  found  in 
differences  of  occupation. 

Both  in  England  and  in  the  United  States  the  two 
forms  of  unionism  have  in  later  times  shown  a  tendency 
to  drop  the  differences  that  have  marked  them.  Thus 
the  trade-unions  in  the  United  States  have  of  late  years 
united  in  larger  federated  organizations ;  first,  in  the  cen- 
tral labor  unions  of  our  cities,  and  more  recently  in  the 
national  body  known  as  the  American  Federation  of 
Labor.  This  national  body  has  even  made  provision  for 
organizations  of  unskilled  workmen  and  for  local  unions 
of  men  of  different  trades  where  those  in  any  single  trade 
are  too  few  for  successful  organization.  The  Knights  of 


WAGES  AND  THE  LABOR  PROBLEM      275 

Labor,  on  the  other  hand,  have  borrowed  a  leaf  from  their 
rivals  by  organizing  separately  a  considerable  number  of 
trades  into  what  they  call  "  district  assemblies." 

Growth  of  Labor  Organizations.  —  Estimates  as  to  the 
numerical  strength  of  labor  organizations  in  the  United 
States  vary  considerably.  Few  of  them,  however,  place 
the  total  number  below  a  million,  and  the  most  recent 
government  estimate,  that  for  July  1, 1901,  was  1,400,000. 
The  number,  of  course,  varies  from  time  to  time.  A 
period  of  prosperity  for  the  organizations  is  generally 
followed  by  one  of  reaction.  The  present  seems  to  be  a 
period  of  maximum  prosperity  following  the  period  of 
depression  lasting  for  several  years  after  about  1893. 
Reaction  has  always  ended  in  a  new  advance,  and  thus  far 
in  the  United  States  each  new  advance  has  carried  the 
labor  organizations  farther  forward  than  ever  before. 
The  Labor  Department  of  the  English  government  in 
1899  estimated  the  membership  of  British  trade-unions  at 
1,802,518. 

Strikes.  —  We  cannot  in  this  book  discuss  all  the  poli- 
cies of  labor  organizations  or  all  their  methods  of  achiev- 
ing their  objects.  One  of  these  methods,  however,  calls 
for  special  comment.  The  strike  constitutes  one  of  the 
chief  weapons  of  labor,  organized  or  unorganized,  just  as 
the  lockout  is  one  of  the  chief  weapons  in  the  hands  of 
the  employers.  Strikes  produce  harm,  and  therefore  every 
effort  should  be  made  to  avoid  them,  if  the  result  can  be 
secured  by  other  means.  It  is  only  as  a  last  resort  that 
they  can  be  justified,  or  are  justified  by  the  unions  them- 
selves. Yet  the  power  of  the  strike  as  a  lever  of  advan- 
tage is  not  to  be  despised.  Observation  based  on  recent 
American  experience  goes  to  show  that  more  than  one- 


276        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

half  of  all  strikes  are  successful  in  enforcing  the  demands 
of  the  unions.  During  the  twenty  years  ending  Decem- 
ber 31,  1900,  50.77  per  cent  of  the  22,793  strikes  were 
successful,  while  13.04  per  cent  of  the  whole  number  were 
partly  successful.  Even  where  strikes  are  apparently 
failures,  they  may  accomplish  much  for  the  employees  by 
inspiring  sufficient  fear  of  recurrence  to  bring  about  fairer 
treatment  from  unwilling  and  unjust  employers. 

Strikes  are  most  likely  to  be  successful  when  they  are 
declared  during  a  period  of  improving  business  ;  and  hence 
strikes  for  higher  wages  are  more  often  successful  than 
those  aimed  to  prevent  a  reduction.  Indeed,  it  has  been 
claimed  that  employers  have  in  some  cases  secretly  en- 
couraged a  strike  when  they  have  desired  to  close  their 
works  during  a  period  of  slack  business,  in  order  to  drive 
a  better  bargain  with  the  men  when  the  strike  should  have 
proved  unsuccessful. 

The  Influence  of  the  Public.  —  A  powerful  influence 
against  violence  and  needless  strikes  is  the  recent  great 
growth  in  public  knowledge  and  public  interest  in  matters 
that  concern  labor.  Public  support  of  their  cause  is  now 
an  object  of  frequent  appeal  by  labor  organizations.  The 
use  of  "  Union  Labels,"  placed  upon  goods  made  by  union 
labor  under  conditions  satisfactory  to  the  organizations,  is 
becoming  increasingly  frequent  and  effective. 

The  National  Consumers'  League  represents  a  move- 
ment of  the  same  sort  from  without  the  ranks  of  labor. 
This  league,  organized  only  a  few  years  ago,  is  rapidly 
extending  its  influence  by  granting  the  use  of  its  "  Con- 
sumers' League  Label "  to  all  manufacturers  of  certain 
classes  of  goods  who  satisfy  the  league  that  they  are  ful- 
filling prescribed  conditions  in  the  employment  and  treat- 


WAGES  AND   THE  LABOR  PROBLEM  277 

ment  of  labor.  As  yet  the  label  is  used  only  on  a  few 
classes  of  women's  and  children's  clothing,  but  it  is  the 
intention  of  the  league  to  carry  its  work  much  farther. 
Incidental  Benefits  of  Labor  Organizations.  —  1.  Promotion 
of  Temperance.  —  Nearly  all  labor  organizations  are  prac- 
tically temperance  societies,  and  many  of  their  officers  are 
total  abstainers  from  alcoholic  drink.  On  the  whole,  it 
may  be  confidently  asserted  that  labor  organizations  have 
greatly  lessened  intemperance  among  workmen. 

2.  Educational  Influence. — It  would  be  hard  to  over- 
estimate the  importance  of  the  educational  feature  of  labor 
organizations.      The  debates   and  discussions  which  the 
unions  foster  stimulate  the  intellect  and  do  much  to  coun- 
teract the  deadening  effect  of  a  widely  extended  division 
of  labor.     Moreover,  they  furnish  opportunities  for  social 
culture  to  women  as  well  as  to  men,  and  thus  lessen  the 
temptation  to  coarse  indulgence  and   develop   the  finer 
side  of  their  nature. 

3.  Elevation  of  the  Standard  of  Life.  —  It  is  often  ob- 
jected against  organized  laborers  that  they  exclude  worthy 
men  from  opportunities  for  employment,  and  seek  by  dis- 
tressing part  of  their  number  to  raise  the  wages  of  the 
rest.     What  they  are  really  trying  to  do  is  to  raise  the 
workman's  standard  of  life,  in  order  that  progress  may 
mean  for  them  not  merely  an  increase  in  the  number  of 
men  employed,  but  rather  a  betterment  of  the  quality  of 
human  life  concerned  in  the  occupation.     It  is  objected 
again  that  the  limitation  of  numbers  in  one  trade  can  only 
result  in  overcrowding  others,  and  that  therefore,  if  all 
trades  were  successfully  organized,  the  results  in  one  part 
of  the  labor  field  would  neutralize  the  results  elsewhere, 
and  nothing  would  be  gained.     But  such  an  objection 


278        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

overlooks  the  essential  fact  that  the  union  tends  to  check 
the  imprudence  that  leads  to  over-population,  and  hence 
to  maintain  a  just  balance  between  the  need  of  society  for 
the  labor  and  the  need  of  the  laborer  for  a  complete  human 
life. 

Weaknesses  of  Labor  Organizations.  —  Some  of  the  weak- 
nesses of  labor  organizations  have  already  been  touched 
upon.  These  and  other  weaknesses,  some  inherent  in  the 
nature  of  the  unions  and  some  accidental,  may  be  briefly 
summarized  as  follows  :  — 

1.  Based  on  Strife.  —  It  too  often  happens  that  labor 
organizations  are  based  on  strife.     They  aim  to  prepare 
their  members  for  industrial  war  ;  but  we  must  hope  for 
peace  in  industrial  society,  and  any  organization  that  does 
not  look  beyond  contention  to  a  cessation  of  strife  has 
inherent  in  it  a  certain  weakness. 

2.  Limitation  of  their  Benefits.  —  They  have  often,  par- 
ticularly in  their  early  history,  sought  to  gain  benefits  by 
a  selfish  and  exclusive  policy  toward  other  laborers.     In 
some  cases,  they  have  been  able  to  build  up  an  evil  labor 
monopoly.     It  must  be  admitted,  on  the  other  hand,  that 
there  is  sometimes,  even  in  these  days,  valid  excuse  for 
limiting  numbers.     Unscrupulous  employers  have  at  times 
sought  to  increase  unduly  the  number  in  a  single  occupa- 
tion in  order  to  have  a  reserve  force  of  unemployed  from 
which  to  draw  in  case  of  need  and  thus  to  keep  down 
wages. 

3.  Production  not  directly  Increased.  — Even  when  labor- 
unions  do  not  actually  try  to  limit  production  by  restrict- 
ing  individual   output,  they  usually   make  no  effort  to 
increase  production  or  to  diminish  the  wastes  of  compe- 
tition.    This  is  narrow,  short-sighted  action.     What  is  to 


WAGES  AND  THE  LABOR  PROBLEM  279 

be  desired  is  not  merely  that  a  greater  proportion  of  pro- 
duced wealth  should  fall  to  the  wage-earners,  but  that  the 
total  national  dividend  to  be  distributed  among  all  classes 
should  be  increased;  in  other  words,  that  the  laborer  should 
receive  an  increasing  share  of  an  increasing  product. 

4.  Ultra-conservatism.  —  While  radical  in  many  ways, 
labor-unions  have  been  too  conservative  in  clinging  to  old 
methods  and  opposing  progressive  policies  that  will  not 
benefit  them  immediately  as  labor  organizations. 

5.  Narrow  and  Short-sighted  Views.  —  It  has  been  one 
of  the  weaknesses  of  labor  organizations  in  general  that 
they  have  not  been  sufficiently  interested  in  public  meas- 
ures and  reforms  designed  to  benefit  society.    For  example, 
they  have  given  too  little  attention  to  sanitary  matters  and 
too  little  support  to  public  health  authorities  in  efforts  to 
benefit  the  poorer  classes.     They  have  underestimated  the 
importance  of  purity  in  politics  and  a  highly  trained  civil 
service.     At  times  they  have  favored  measures  which  were 
bound  to  be  ultimately  injurious  to  them,  simply  because 
such  measures  would  increase  temporarily  the  supply  of 
work.     Opposition  to  labor-saving  machinery   and  pro- 
cesses is  of  the  same  character. 

6.  Lack  of  Flexibility.  —  Labor  organizations  show  an- 
other inherent  weakness  which  is  common  to  all  great  po- 
litical and  social  organizations.    Here  red  tape  is  necessary. 
General  rules  must  for  the  most  part  govern,  and  individ- 
ual interests  must  often  be  sacrificed  or  injured  in  seeking 
the  welfare  of  the  whole.     One  who  examines  into  the  na- 
ture of  labor  organizations  will  be  able  to  find  many  good 
reasons  why  union  men  should  object  to  working  with 
non-union  men.     (a)  The  union  entails  certain  expenses, 
and  union  men  object  to  having  non-union  men  reap  the 


280        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

benefits  secured  to  labor  by  the  organization  without  shar- 
ing in  the  burden  of  support.  (5)  An  even  more  serious 
argument  lies  in  the  danger  that  employers  will  gradually 
substitute  non-union  men  for  union  men  who  are  strong 
in  their  organization,  and  thus  break  down  the  union  be- 
fore the  workmen  perceive  the  drift  of  things.  Pretext 
can  usually  be  found  for  discharging  a  workman,  obnox- 
ious as  a  labor-leader,  however  faithful  and  efficient  he 
may  be  in  his  work. 

7.  "  Itching  "  for  Political  Power.  —  Labor  organizations 
too  often  have  acted  on  the  assumption  that  their  mem- 
bers are  fitted  for  political  administration.  Whatever  the 
cause  may  be,  however  much  the  fact  may  be  regretted, 
whatever  the  hope  that  the  future  holds  out  to  them,  labor 
organizations  should  frankly  recognize  that  they  have  not 
the  trained  intelligence  or  the  trained  moral  character 
needed  for  governing  our  country.  Whatever  benefits 
the  wage-earner  truly  and  permanently,  we  may  all  join 
in  demanding,  confident  that  it  will  also  benefit  the  coun- 
try as  a  whole  ;  but  the  tendency  to  encourage  the  politi- 
cal aspirations  of  workingmen  cannot  be  accepted  as  in 
the  line  of  such  reform.  The  appointment  of  working- 
men  to  office  is  an  expedient  which  fertile  demagogues 
have  used  more  than  once  to  turn  the  attention  of  the 
workmen  from  real  reforms. 

All  this  does  not  militate  against  the  recognition  of 
ability  and  merit  in  a  member  of  an  organization,  when 
such  ability  and  merit  actually  exist.  Some  of  the  best 
appointments  made  under  the  Low  administration  in  New 
York  City  were  from  the  number  of  organization  men. 
But  workmen  should  scan  such  appointments  narrowly  to 
make  sure  that  they  are  not  simply  bribes.  Finally,  it 


WAGES  AND   THE  LABOR  PROBLEM  281 

must  be  remarked  that  the  election  of  thoughtful  and 
intelligent  workmen  to  legislative  bodies  stands  on  a  dif- 
ferent footing  from  that  of  their  appointment  to  adminis- 
trative office.  Legislative  bodies  should  include,  so  far  as 
possible,  representatives  of  all  social  and  industrial  classes, 
but  they  should  have  in  their  service  highly  trained  ad- 
ministrative experts  to  carry  out  their  policies.  Hence 
the  efforts  of  labor  organizations  to  secure  representation 
in  the  municipal,  state,  and  Federal  legislatures  is  in  keep- 
ing with  intelligent  and  conservative  labor  policy. 

III.    THE  RELATION  OF  THE  LABORER  TO  THE  PROD- 
UCT OF  HIS  LABOR 

Labor  organizations  strive  to  secure  higher  wages  and 
better  conditions  of  employment  for  workingmen  than 
they  would  otherwise  obtain,  and  thus  to  increase  their 
share  of  the  product  of  industry.  But  both  by  private 
employers  and  by  economists  other  plans  have  been  con- 
sidered for  securing  to  the  laborer  a  more  favorable  rela- 
tion to  the  product  of  his  labor.  Some  of  these  plans  call 
for  discussion  at  this  point. 

1.  Piece-work  Wages.  — The  system  of  paying  labor  by 
the  unit  of  product — or  piece-work  wages — is  a  modifica- 
tion of  the  usual  system  of  time  wages,  where  the  laborer 
is  paid  a  fixed  sum  for  each  unit  of  time  worked.  The  sys- 
tem of  piece  wages  can  only  have  a  fair  trial  in  industries 
which  allow  considerable  division  of  labor  among  occupa- 
tions that  are  of  a  routine  nature.  Thus  compositors  in 
a  printing-office  may  be  paid  by  the  thousand  type  set. 
Payment  by  the  piece,  where  possible,  has  certain  evident 
advantages  both  for  laborer  and  employer,  and  has  met 


282        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

with  very  general  favor  or  acceptance  among  trade-unions. 
But  in  some  industries  abuses  of  the  system  have  been  so 
many  and  so  flagrant  as  to  arouse  active  opposition.  It 
has  at  times  been  used  by  unscrupulous  employers  to 
break  down  regulations  and  even  laws  limiting  the  hours 
of  work,  and  more  frequently  still  to  bring  about  a  reduc- 
tion of  wages.  Thus,  after  the  workers  have  attained  a 
high  rate  of  speed  by  straining  every  nerve  and  muscle  to 
earn  high  wages,  the  price  per  piece  is  reduced  in  such  a 
way  that  the  workmen  can  earn  by  their  increased  exer- 
tion little  if  any  more  than  they  were  earning  before 
the  piece-work  system  was  introduced. 

2.  The   Sliding  Scale.  —  The   system    known   as   the 
"  sliding  scale,"  by  which  wages  are  made  to  depend  upon 
the  price  of  the  product,  has  been  adopted  quite  generally 
among  iron  and  steel  workers   and   coal  miners  in  the 
United  States  and  England.     In  recent  years  complaints 
have  been  made  that  employers  under  this  system  do  not 
always  truthfully  declare  the  price  of  product,  and  other 
difficulties  have  appeared  which  cannot  well  be  explained 
here. 

3.  Profit- sharing. — Under  a  system  of  profit-sharing 
the  workmen  in  any  factory,  or  at  least  a  part  of  them,  are 
allowed  to  share  in  the  profits  of  the  concern.     A  stated 
wage  is  paid,  and  then,  at  regular  intervals,  a  part  of  the 
profits  of  the  business  is  divided  among  the  employees. 
There  are  many  differences  of  detail  which  do  not  concern 
us  here.       Advocates  of  the  system   point   out   that  it 
(a)  promotes   economical   use  of  materials  and  machinery 
by  employees,  (6)  generally  increases  their  zeal  and  effi- 
ciency, and  hence  results  in  (<?)  a  larger  total  product  and 
a  (d)  larger  revenue  for  the  wage-receivers.     Its  weakness 


WAGES  AND   THE  LABOR  PROBLEM  283 

is  that  it  is  not  expedient  to  make  the  workmen  bear 
the  losses  as  well  as  participate  in  the  gains,  while  the 
system  without  such  a  provision  is  likely  to  come  to  grief. 
Profit-sharing  has  sometimes  been  extended  to  include 
capital-sharing;  that  is,  part  ownership  of  the  capital  by 
the  workmen,  with  some  participation  in  the  manage- 
ment. 

4.  Cooperation.  —  If  industry,  as  ordinarily  organized 
in  our  great  mercantile  and  manufacturing  establishments, 
may  be  likened  to  a  form  of  despotism,  an  establishment  in 
which  workmen  participate  in  capital  ownership  and  man- 
agement, under  the  chief  control  of  one  who  is  recognized 
as  an  industrial  superior,  may  in  the  same  way  be  likened 
to  a  constitutional  monarchy.  And  finally,  as  opposed  both 
to  industrial  despotism  and  to  industrial  monarchy,  we 
have  the  third  form,  industrial  democracy.  Industrial 
democracy  means  self-rule,  self-control,  self-direction,  by 
the  workmen  in  their  efforts  to  gain  a  livelihood.  This 
is  achieved  in  pure  cooperation.  Cooperation  may  have 
either  of  two  forms,  coercive  or  voluntary.  Coercive  coop- 
eration, which  is  socialism,  will  be  discussed  in  a  separate 
chapter.  Here  we  are  concerned  only  with  the  voluntary 
form,  which  is  the  one  that  is  always  meant  when  the  word 
"  cooperation  "  stands  alone. 

Under  this  system  the  workmen  combine  their  own 
capital,  purchase  their  own  plant,  and  manage  their  own 
industrial  affairs,  in  their  own  way,  at  their  own  risk, 
sharing  profit  or  loss  as  the  case  may  be.  At  least  this  is 
the  method  of  productive  cooperation.  Distributive  coo'p- 
eration,  on  the  other  hand,  is  a  system  of  cooperation  in 
wholesale  or  retail  trading.  Distribution  is  here  used 
not  in  the  sense  in  which  it  is  ordinarily  used  in  eco- 


284       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

nomics,  but  in  the  sense  in  which  we  speak  of  the  mer- 
chant's business  as  distributive. 

Distributive  cooperation  is  only  an  imperfect  form  of 
cooperation.  Consumers  of  finished  goods  combine  to 
purchase  what  they  need,  and  thus  save  middlemen's 
profits.  They  form  a  regular  stock  company,  subscribe 
for  shares,  employ  a  manager  and  clerks,  —  who  often  do 
not  even  share  in  profits,  —  and  start  a  business.  Profits 
are  sometimes  divided  only  on  the  shares,  but  the  approved 
way  is  to  pay  a  moderate  interest  on  the  capital  and  then 
divide  profits  among  stockholders  and  customers.  In  such 
cases  the  customers  share  in  proportion  to  their  purchases, 
the  division  being  made  at  stated  intervals. 

In  England  and  Scotland  distributive  cooperation  has 
met  with  very  great  success.  Productive  cooperation,  on 
the  other  hand,  has  disappointed  the  expectations  of  its 
earlier  advocates.  France  seems  to  have  had  better  suc- 
cess than  England  in  productive  cooperation.  In  the 
United  States  some  instances  of  success  are  recorded,  and 
many  more  undertakings  of  the  sort  have  been  partly  suc- 
cessful. One  good  example  of  successful  pure  productive 
cooperation  is  that  of  the  three  cooperative  barrel  manu- 
facturing companies  in  Minneapolis,  which  together  have 
an  annual  output  of  nearly  two  million  barrels.  In  Eng- 
land and  Scotland  Wholesale  Societies  have  been  formed 
for  distributive  cooperation,  thus  furnishing  at  the  same 
time  a  steady  market  for  some  important  productive  co- 
operative concerns  which  they  have  organized. 

The  Strength  and  Weakness  of  Cooperation. — Pure  coop- 
eration (1)  prevents  strikes  by  completely  identifying  the 
interests  of  labor  and  capital.  It  (2)  stimulates  energy 
and  (3)  promotes  economy  and  thrift,  since  self-interest, 


WAGES  AND   THE  LABOR  PROBLEM  285 

which  usually  animates  only  the  employer,  here  animates 
all  the  cooperators.  No  slighting  of  work  can  be  tolerated 
and,  eye  service  vanishing,  (4)  much  labor  of  supervision 
is  saved.  Best  of  all,  there  is  (5)  constant  education  of  the 
cooperators  in  discipline  and  business  detail. 

On  the  other  hand,  to  speak  of  the  weaknesses  of  the 
system,  (1)  divided  counsels  often  render  the  movements 
of  such  a  business  clumsy  and  slow.  Action  cannot  be  so 
quick  and  decisive  as  when  one  man  acts  on  his  own 
responsibility.  (2)  It  has  been  hard  for  workmen  to 
recognize  the  necessity  of  securing  expert  talent  for  the 
work  of  supervision  and  organization.  Failure  has  often 
been  due  (3)  to  moral  defects  on  the  part  of  the  workmen. 
(4)  Finally,  where  success  has  attended  the  first  steps  of 
such  a  movement,  the  very  prosperity  has  sometimes  pro- 
duced dissension  and  disintegration. 

Arbitration  and  Conciliation.  —  We  cannot  dismiss  this 
subject  of  the  relation  of  the  laborer  to  the  product  of  his 
labor  without  a  few  words  regarding  the  part  that  arbi- 
tration and  conciliation  have  played  and  are  to-day  play- 
ing in  the  strife  of  interests  by  which  the  social  income  is 
portioned  out.  Conciliation  is  a  term  applied  to  the  regu- 
lar efforts  made  by  representatives  of  employer  and  employed 
or  by  a  third  person  to  prevent  differences  from  arising  or 
to  heal  such  differences  before  matters  reach  an  acute  stage. 
Conciliation  aims  to  prevent  strikes  or  other  labor  troubles  ; 
arbitration  seeks  to  adjust  matters  when  acute  trouble  has 
arisen.  As  is  evident,  conciliation  is  preferable,  wherever 
and  whenever  it  is  possible. 

Both  conciliation  and  arbitration  have  accomplished 
much  for  the  preservation  of  industrial  peace  wherever 
thoroughly  and  honestly  tried.  Sometimes  boards  are 


286        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

appointed  by  employers  and  employed,  and  sometimes 
such  boards  are  appointed  by  public  authority.  In  the 
United  States  a  large  board  with  national  scope  has  been 
appointed  by  the  National  Civic  Federation.  In  this 
board  there  are  representatives  of  labor  and  capital,  to- 
gether with  other  men  of  national  prominence. 

Until  recently  arbitration,  even  when  public  authorities 
have  provided  boards,  has  always  been  voluntary.  That 
is,  the  findings  of  arbitration  boards  were  legally  binding 
upon  neither  employers  nor  employees,  and  therefore 
gained  their  strength  from  the  awakening  of  the  public 
interest  and  the  enlightening  of  the  public  mind  as  to  the 
merits  of  the  dispute.  Indeed,  it  came  to  be  a  settled 
conclusion  in  the  minds  of  economists  and  others  that 
compulsory  arbitration  could  not  be  successfully  attempted 
by  government.  But  within  the  last  decade  compulsory 
conciliation  and  arbitration  have  been  given  a  trial  on  a 
large  scale  in  New  Zealand,  the  successor  of  the  United 
States  as  a  laboratory  of  social  experiment,  and,  according 
to  the  opinion  of  some  able  investigators,  the  plan  has 
proved  its  value  and  practicability.  Even  those  who  are 
not  convinced  of  the  value  of  the  system  for  New  Zealand 
admit  that  the  people  after  ten  years  of  trial  have  no  desire 
to  return  to  the  chaos  prevailing  in  industry  before. 
Moreover,  in  1901,  New  South  Wales  passed  a  law  simi- 
lar in  the  main  to  that  of  New  Zealand,  after  an  ex- 
haustive parliamentary  inquiry  into  the  working  of  the 
New  Zealand  Act.  In  the  light  of  these  facts  the  general 
opposition  hitherto  manifested  toward  compulsory  arbi- 
tration may  be  lessened  or  possibly  even  changed  to  active 
support.  The  question  may  be  regarded  as  still  open. 

Factory  Legislation  and   Inspection.  —  Factory  legisla- 


WAGES  AND   THE  LABOR  PROBLEM  287 

tion  and  inspection  also  need  a  few  words  of  comment  in 
this  connection,  although  the  subject  has  been  more  fully 
treated  in  the  chapter  on  the  Industrial  Stage  in  England. 
Labor  laws,  honestly  conceived  and  properly  enforced, 
have  been  productive  of  incalculable  good.  England  is 
the  model  country  in  this  respect,  and  in  our  own  Union 
Massachusetts  is  the  banner  state.  Labor  legislation 
should  be  designed  to  keep  children  away  from  regular 
factory  work  and  in  the  school ;  it  should  restrict  to  the 
utmost  the  employment  of  women;  it  should  limit  the 
hours  of  employment  for  different  classes  of  work-people, 
particularly  for  women,  young  persons,  and  children,  to 
the  length  of  day  prescribed  by  medical  experience,  and 
should  secure  regular  and  convenient  hours  of  leisure, 
such  as  are  afforded  by  a  Saturday  half -holiday ;  it  should 
compel  employers  to  fence  in  dangerous  machinery  and 
otherwise  guard  against  preventable  accident ;  and  by  em- 
ployers' liability  acts  it  should  render  employers  pecun- 
iarily responsible  for  accidents  to  employees.  No  country 
has  ever  suffered  in  international  competition  by  approxi- 
mation to  the  goal  here  described. 

SUMMARY 

1.  General  wages  are  determined  by  bargaining,  between  limits  fixed 

on  the  one  side  by  the  product  of  the  labor,  and  on  the  other  by 
the  cost  of  subsistence,  as  modified  by  the  standard  of  living. 
The  precise  wage  is  determined  by  the  relative  strength  of  the 
two  sides  to  the  bargain. 

2.  Differences  in  relative  wages  are  due  to  special  conditions  affect- 

ing different  employments. 

3.  Labor  organizations,  a  natural  development  of  modern  industry, 

have  improved  the  status  of  labor,  and  have  cultivated  temper- 
ance and  thrift. 


288       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

4.  Against  labor-unions  it  may  be  charged  that  they  are  based  on 

strife,  that  they  are  often  short-sighted  and  ultra-conservative, 
and  are  forgetful  of  broad  social  interests. 

5.  Piece-work  wages,  the  sliding  scale,  profit-sharing,  and  coopera- 

tion are  plans  that  have  been  tried  for  securing  to  the  laborer  a 
more  favorable  relation  to  the  product  of  his  labor. 

6.  Arbitration  and  conciliation  are  playing  an  increasing  part  in  the 

settlement  of  labor  disputes. 

QUESTIONS 

1.  How  does  the  standard  of  living  affect  general  wages?    Relative 

wages? 

2.  Name  the  circumstances  producing  differences  in  relative  wages. 

What  is  the  "  Iron  Law  of  Wages  "  ? 

3.  Name  the  different  groups  of  laborers.     Classify  different  occupa- 

tions according  to  this  grouping. 

4.  What  two  types  of  labor  organization   are  there?    Discuss  the 

change  in  the  public  attitude  toward  unions. 

5.  What  are  strikes?    What  are  their  chances  of  success ? 

6.  Discuss  the  different  systems  of  wage  payment ;  their  advantages 

and  disadvantages,  and  their  success. 

7.  Distinguish  between  arbitration  and  conciliation.    What  is  the 

present  status  of  the  question  of  compulsory  arbitration  ? 

8.  What  are  some  of  the  objects  that  can  be  obtained  through  honest 

labor  legislation? 

LITERATURE 

Ashley,  W.  J. :  The  Adjustment  of  Wages.  (Excellent  reference  for 
joint  agreements,  the  sliding  scale,  and  the  tendency  of  employ- 
ers and  employees  to  organization.) 

Clark,  J.  B. :  The  Distribution  of  Wealth,  and  article  in  North  American 
Review,  January,  1902,  entitled  "  Consolidated  Labor." 

Davidson,  J. :  The  Bargain  Theory  of  Wages. 

Ely,  R.  T. :  Studies  in  the  Evolution  of  Industrial  Society,  Bk.  II, 
Ch.  X. 

Oilman,  N.  P. :  Profit-sharing. 

Lloyd,  H.  D. :  Newest  England. 


WAGES  AND   THE  LABOR  PROBLEM  289 

Lowell,  Josephine  Shaw :  Industrial  A  rbitration  and  Conciliation. 

Rogers,  J.  E.  T. :   Work  and  Wages,  Ch.  VIII,  pp.  196-206. 

Schloss,  D.  F. :  Methods  of  Industrial  Remuneration. 

Schoenhof ,  J. :  The  Economy  of  High  Wages. 

Smith,  Adam  :   Wealth  of  Nations,  Bk.  I,  Ch.  I. 

Stimson,  F.  J. :  Handbook  to  the  Labor  Law  of  the  United  States. 

Taussig,  F.  W. :   Wages  and  Capital. 

Walker,  F.  A. :  The  Wages  Question. 

Webb,  Sidney  and  Beatrice :  Industrial  Democracy,  Part  II,  Ch.  I, 

pp.  49-50,  and  A  History  of  Trade-unionism. 
Wright,  C.  D. :  The  Industrial  Evolution  of  the  United  States,  Part  III, 

pp.  273-293,  and  pp.  301-320. 


CHAPTER  IV 
INTEREST 

AFTER  our  long  excursion  into  the  subject  of  labor  and 
its  reward,  it  may  be  well  for  us  to  pause  a  moment  and 
place  in  the  right  connection  what  is  to  follow.  It  should 
be  recalled  that  under  the  general  subject  of  distribution, 
or  the  division  of  the  social  income  among  the  factors  that 
have  worked  to  produce  it,  we  have  now  discussed  the  sub- 
ject of  rent,  the  share  received  by  the  owners  of  land,  and 
wages,  the  share  received  by  labor.  We  come  now  in 
regular  order  to  a  discussion  of  the  share  apportioned  to 
the  owners  of  capital.  Land  and  labor,  in  their  broadest 
sense,  are  the  only  original  elements  in  production.  Of 
course,  as  has  been  explained,  land  includes  not  only  build- 
ing lots  and  farming  land,  but  also  mines  and  rivers  and 
fisheries,  and,  in  short,  all  natural  and  unproduced  agen- 
cies of  production  other  than  labor.  Capital,  on  the  other 
hand,  is  not  a  primary  or  original  factor,  but  a  secondary 
or  derived  one. 

Unlike  land,  capital  is  produced,  but  it  is  produced  for 
the  purpose  of  further  production.  In  fact,  we  may  define 
capital  as  the  produced  instruments  of  production. 

How  Interest  is  Determined.  —  Interest  is  the  return 
to  capital.  By  what  law  is  its  amount  determined  ? 
This  question  has  been  under  a  constant  fire  of  discus- 
sion, and  still  appears  to  many  economists  as  one  of 

290 


INTEREST  291 

the  unsettled  problems.  The  ancients  in  general  denied 
that  interest  rested  on  any  justifiable  law.  Aristotle 
thought  it  unjust,  and  Cicero  classes  it  with  murder. 
Throughout  the  Middle  Ages  it  was  condemned  by  the 
Church  and  prohibited  by  statute.  One  of  the  main  rea- 
sons for  this  attitude  is  found  in  the  fact  that  until  recent 
centuries  little  capital  was  loaned  for  productive  purposes. 
Loans  were  usually  made  for  personal  consumption  and 
for  the  relief  of  the  distressed.  The  lender  could  not 
have  used  the  amount  loaned  productively,  and  the  bor- 
rower did  not  desire  the  loan  for  productive  uses.  Despite 
public  opinion  and  the  law,  however,  the  taking  of  interest 
continued  customary  wherever  commerce  was  developed, 
and  with  the  industrial  awakening  in  the  modern  period 
of  capitalism  it  was,  of  course,  allowed  as  a  necessity. 
Being  allowed,  it  must  needs  be  justified,  and  the  expla- 
nations and  justifications  have  been  numerous  and  various. 
Earlier  economists  explained  the  laws  of  rent  and  wages, 
and  then  naively  concluded  that  capital  had  what  was  left. 
The  owner  of  capital  was  thus  made  the  "  residual  claim- 
ant" in  distribution.  Others  have  thought  that  capital 
and  land  receive  returns  according  to  fixed  laws,  and  that 
labor  is  the  residual  claimant.  The  truth  seems  to  be 
that  no  one  of  the  three  is  a  residual  claimant,  but  that 
each  receives  a  return  determined  by  fixed  laws.  What, 
then,  shall  we  say  is  the  fixed  law  by  which  interest  is 
determined  ?  In  answering  this  question,  we  shall  try  to 
make  a  statement  of  the  case  which  shall  reconcile  con- 
flicting theories,  at  the  same  time  that  we  indicate  briefly 
what  these  theories  are. 

Demand  and  Supply.  —  In  the  first  place,  it  is  probable 
that   all   economists   would    agree   that    interest,    which 


292        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

expresses  the  value  of  the  use  of  capital,  is  determined,  as 
is  all  value,  by  the  relation  between  demand  and  supply. 
Where  there  is  a  strong  demand  for  a  limited  supply  of 
capital,  the  marginal  utility  of  the  capital  will  be  high, 
and  the  capitalist  can  exact  a  large  return  in  the  form  of 
interest.  If  the  demand  for  capital  be  slight  relatively  to 
the  supply,  then  the  rate  of  interest  will  be  low.  Mani- 
festly, however,  this  does  not  carry  us  far  upon  our  way. 
We  must  go  on  to  inquire  what  it  is  that  determines  the 
demand  and  supply. 

The  Productivity  Theory.  —  Investigation  of  the  demand 
for  capital  brings  us  to  one  theory  of  interest  which  has 
been  widely  accepted, — the  "productivity  theory."  To 
the  older  economists,  who  regarded  most  economic  ques- 
tions from  the  standpoint  of  the  business  manager,  it 
seemed  sufficient  to  say  that  interest  is  paid  because  capital 
is  productive,  and  that  the  amount  of  interest  is  deter- 
mined by  the  degree  of  productiveness.  From  the  side  of 
demand  we  may  agree  that  the  productivity  theory  does 
give  us  an  explanation  of  interest.  When  capital  is  very 
productive  there  will  be  a  great  demand  for  it.  But  while 
this  explains  in  part  why  men  will  and  can  pay  interest 
for  the  use  of  capital,  it  does  not  explain  why  they  must 
do  so. 

The  Abstinence  Theory.  —  To  understand  why  interest 
must  be  paid,  we  must  investigate  the  subject  of  the 
supply  of  capital,  and  this  brings  us  to  the  so-called 
"abstinence  theory."  It  has  been  said  by  some  econo- 
mists that  interest  is  sufficiently  explained  when  it  is 
described  as  the  wage  or  reward  for  abstinence.  As  we 
have  seen,  capital  is  the  result  of  a  special  production 
made  possible  by  saving.  Saving  or  abstinence  may  not 


INTEREST  293 

in  any  particular  instance  involve  any  great  degree  of 
suffering.  Millionnaires  who  do  not  consume  at  once  and 
finally  all  that  they  have,  are  not  thereby  made  to  suffer 
the  pangs  of  hunger.  It  may  be  that  they  would  have 
great  difficulty  in  consuming  any  large  part  of  their 
goods.  But  saving  does  mean,  none  the  less,  the  con- 
sumption of  less  than  one  might  consume.  We  cannot 
have  capital  if  all  men  consume  all  the  goods  that  they 
can  obtain.  It  may  help  us  to  understand  the  relation 
between  saving  and  interest  if  we  will  think  of  actual 
saving  as  being  the  result  of  varying  degrees  of  self- 
denial.  There  are  probably  many  persons  who  would 
rather  put  by  part  of  their  present  goods,  even  if  they 
could  not  thus  obtain  interest,  or  even  if  they  had  to  pay 
a  slight  amount  for  the  safe -keeping  of  their  savings. 
If  very  little  capital  were  required,  therefore,  the  interest 
rate  might  fall  to  zero,  since  those  who  wished  to  save 
would  be  glad  to  lend  their  goods  with  a  simple  guarantee 
of  repayment.  But  if  capital  is  highly  productive  and  in 
great  demand,  it  will  not  be  possible  to  secure  the  desired 
capital  from  the  savings  of  those  whose  abstinence  repre- 
sents no  sacrifice.  It  may  be  that  when  more  capital  is 
demanded,  an  increase  which  will  bring  the  productive- 
ness of  the  capital  and  the  abstinence  necessary  to  its  for- 
mation into  equilibrium,  may  be  effected  at  a  rate  of  one 
per  cent.  Suppose  the  productiveness  of  the  capital  to  be 
still  further  increased.  Then  those  who  wish  to  engage  in 
productive  enterprises  will  be  able  to  pay  a  higher  rate 
and  will  increase  the  demand  for  capital.  But,  other 
things  being  equal,  those  who  would  just  save  the  needed 
amount  of  capital  at  one  per  cent  must  be  paid  a  higher 
price  if  they  are  to  undergo  the  added  sacrifice  necessary 


294       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

to  the  accumulation  of  more  capital.  This  explanation 
should  make  it  clear  that  on  the  side  of  supply  it  is  to 
the  estimate  of  the  marginal  investor  —  the  investor,  or 
abstainer,  who  is  just  tempted  to  save  the  marginal  invest- 
ment, by  the  given  rate  of  interest  —  that  the  rate  corre- 
sponds. It  is  equally  evident  that  all  the  savings  that 
would  be  made  for  nothing,  or  that  would  be  made  at 
a  lower  rate,  while  they  affect  the  rate  very  closely,  do 
not  directly  determine  it.  We  may  say  in  conclusion 
of  this  matter,  then,  that  interest  is  fixed  on  the  side  of 
the  supply  of  capital  at  a  point  which  just  repays  the  sac- 
rifice involved  in  the  marginal  investment.  As  has  been 
said,  this  rate,  thus  fixed,  also  equalizes  the  sacrifice  of 
the  marginal  investor  with  the  productivity  of  the  mar- 
ginal capital  in  use. 

The  Austrian  Theory  of  Interest.  —  But  what  is  it  that 
determines  the  rate  which  the  marginal  investor  will  re- 
gard as  just  repaying  him  for  his  saving  or  abstinence  ? 
This  question  finds  its  answer  in  the  theory  of  interest 
which  is  usually  associated  with  the  name  of  Professor 
von  Bohm-Bawerk,  one  of  the  leaders  of  the  so-called 
Austrian  or  psychological  school  of  economists.  To  re- 
peat our  question  in  another  form,  Why  is  it  that  men  — 
for  instance,  the  marginal  investor  —  will  not  give  $50 
now  for  $50  ten  years  hence,  even  though  all  risk  should 
be  amply  covered  by  insurance  ?  Why  will  not  the  mar- 
ginal investor  lend  his  money  without  interest  even  when 
the  loan  involves  no  risk  ?  Simply  because  desire,  which 
is  the  source  of  value,  is  stronger  for  things  near  than  for 
things  far  away.  And  for  the  same  reason  the  one  who 
borrows  is  willing  to  pay  for  $50  to  be  repaid  a  year  from 
now  more  than  the  $50  which  he  borrows  in  the  present. 


INTEREST  295 

Human  experience  in  a  thousand  lines  furnishes  abun- 
dant proof  of  this.  The  wants  of  men  are  like  Esau's  hun- 
ger. He  would  rather  have  —  he  values  higher — a  mess 
of  pottage  now  than  a  whole  inheritance  in  the  future. 
"A  bird  in  the  hand  is  worth  two  in  the  bush."  Distant 
enjoyments  are  vague  to  men's  minds,  while  near  ones  are 
vivid  and  tempting.  Thus  it  is  that  a  man  will  rarely 
give  present  goods  for  future  goods  in  like  amount,  be- 
cause future  goods  are  less  valuable  than  present  goods. 

Yet  it  becomes  apparent  on  a  moment's  reflection  that 
there  is  the  greatest  difference  among  men  in  the  compara- 
tive estimates  which  they  place  upon  the  present  and  the 
future.  This  is  in  part  (1)  a  matter  of  civilization.  Thus 
travellers  have  again  and  again  pointed  out  that  among 
primitive  peoples  there  is  the  utmost  recklessness  and  im- 
providence of  the  future.  Hence,  among  savages,  if  inter- 
est were  demanded  or  allowed  at  all,  the  rate  would  be 
very  high.  The  comparative  valuation  of  present  and  fu- 
ture enjoyments  (2)  varies  widely  also  among  civilized  men. 
Some  there  are  who  are  almost  as  reckless  of  the  future  as 
is  the  savage,  while  there  are  others  who  would  be  glad  to 
exchange  a  quantity  of  present  goods  for  a  like  quantity 
assured  to  them  in  the  future.  The  provident  classes 
would  therefore  save  even  if  the  rate  of  interest  should 
fall  to  a  very  low  figure.  Finally,  (3)  the  comparative  valu- 
ation varies  widely  according  to  the  affluence  of  the  indi- 
vidual. What  we  must  have  to  satisfy  the  pangs  of 
hunger  to-day  is  evidently  more  highly  valued  than  the 
same  things  can  be  when  obtainable  only  at  a  future  time. 
Other  things  equal,  then,  the  millionnaire  will,  of  course, 
overvalue  the  present  less  than  will  his  poorer  neighbor. 
The  man  who  has  an  income  just  sufficient  to  satisfy  his 


296        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

physical  requirements  cannot  save,  no  matter  how  high 
the  interest  rate  may  be.  And  so  we  come  back  to  our 
marginal  investor,  who  in  the  given  state  of  civilization  is 
of  such  a  temperament  and  is  of  such  a  degree  of  affluence  or 
poverty  that  he  will  just  invest  the  marginal  dollar's  worth 
of  capital  when  the  rate  of  interest  will  repay  his  sacrifice,  or, 
in  other  words,  will  make  the  goods  which  he  is  to  have  in  the 
future  equal  in  his  mind  to  the  goods  which  he  abstains  from 
consuming  in  the  present. 

Not  least  among  the  contributions  of  the  Austrian 
economists  to  the  theory  of  interest  has  been  their  very 
complete  explanation  of  what  they  call  the  "technical 
superiority"  of  future  goods,  or  capital,  in  the  work  of 
production.  The  point  has  already  been  noted  in  the  dis- 
cussion of  the  general  subject  of  production,  but  it  may 
be  well  to  remind  the  student  again  at  this  point  that  — 
to  make  a  summary  statement  of  it  —  capital  enables  men 
to  increase  production  by  the  use  of  natural  forces  which  could 
not  otherwise  be  used;  and  this  use  of  natural  forces  is  ren- 
dered possible  by  the  fact  that  capital  enables  men  to  substi- 
tute roundabout  processes  for  direct  ones  and,  as  a  necessary 
incident,  to  lengthen  the  average  interval  of  production. 
Evidently,  this  technical  superiority  of  future  goods  acts 
directly  to  stimulate  the  demand  for  capital. 

Summary.  —  Let  us  now  retrace  the  steps  we  have  taken 
and  state  in  summary  form  the  theory  of  interest  which  is 
here  developed.  Interest  is  determined  primarily  by  the 
relation  between  the  demand  for  capital  and  the  supply  of  it, 
the  rate  being  such  as  will  make  possible  the  widest  possible 
use  of  capital  in  the  existing  state  of  demand  and  supply. 
The  demand  for  capital  is  determined  by  its  productiveness, 
as  measured  by  the  value  of  the  product.  The  supply  is 


INTEREST  297 

determined  by  the  difference  in  the  value  of  present  and 
future  goods  in  the  minds  of  investors.  The  rate  is  there- 
fore fixed  at  a  point  which  will  bring  into  equilibrium  the 
productiveness  of  capital,  measured  by  the  value  of  its  prod- 
uct, and  the  sacrifice  involved  in  the  marginal  investment  of 
capital,  as  determined  by  the  relative  valuation  of  present 
and  future  goods  in  the  mind  of  the  marginal  investor. 

Interest  on  Different  Kinds  of  Capital.  —  For  practical 
purposes  we  may  distinguish  three  special  loan  markets 
which  are  temporarily  affected  by  different  conditions,  and 
within  which  the  rate  of  interest  may  at  any  time  be  dif- 
ferent. (1)  Long-time  loans  are  usually  loans  of  producers' 
goods.  If  money  is  the  immediate  object  of  the  loan,  the 
borrower  must  convert  the  money  into  the  form  of  capital 
which  he  desires.  (2)  Short-time  loans,  on  the  other  hand, 
are  usually  loans  of  money  for  use  as  money.  Men  who 
have  to  meet  money  obligations  want  money  and  not  goods 
when  they  borrow  for  the  purpose.  If  they  can  only  bor- 
row other  goods,  these  goods  must  be  converted  by  the 
borrower  into  money  before  he  can  satisfy  his  obligations. 
Such  loans  as  these  are  an  important  feature  in  our  large 
cities  where  business  notes  are  constantly  falling  due  and 
must  be  met,  and  where  the  buying  of  stocks  calls  for  large 
cash  payments.  Although  these  two  classes  of  loans  are 
subject  to  different  conditions,  they  are  bound  in  the  long 
run  to  react  one  upon  another.  Thus,  if  the  rate  for  long- 
time loans  temporarily  falls  to  a  low  point,  while  short- 
time  loans  command  a  high  rate,  producers'  goods  will  be 
converted  as  rapidly  as  possible  into  money,  and  the  money 
will  enter  into  the  short-time  loan  market,  thus  raising 
the  rate  in  the  one  and  lowering  it  in  the  other. 

The  interest  paid  on  (3)  loans  of  wealth  which  is  not  capital, 


298        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

—  not  used  for  purposes  of  further  production,  —  is  gov- 
erned by  the  rate  of  interest  paid  for  capital.  It  is  the 
same  percentage  of  value.  The  obvious  reason  is  the 
power  of  the  owner  to  sell  his  non-capitalistic  goods 
and  invest  the  proceeds  in  capital  goods.  If  we  should 
adopt  the  view  that  houses  are  not  capital,  but  simply 
"  consumers'  goods,"  we  should  similarly  have  the  rate  of 
interest  governed  by  the  forces  controlling  the  rate  of 
interest  on  capital. 

Circumstances  affecting  the  Rate.  —  There  is  both  a 
real  and  an  apparent  fluctuation  in  the  interest  rate  from 
place  to  place  and  from  time  to  time.  The  apparent 
fluctuation  is  that  which  is  due  to  the  inclusion  of  insur- 
ance against  risk  in  a  single  rate  with  the  real  interest. 
Thus  loans  on  good  security  always  command  a  lower  rate 
than  others.  This  simply  means  that  a  man  who  takes 
some  risks  as  to  getting  his  money  back  adds  to  the  pure 
interest  a  premium  to  cover  the  risk.  Gross  interest,  then, 
includes  the  two  elements  of  net  or  pure  interest,  —  pay- 
ment for  the  loan  itself,  —  and  insurance  against  risk  of 
loss,  or  of  trouble  in  collection.  Naturally,  therefore, 
interest  tends  to  be  higher  in  uncivilized  countries  and 
backward  communities.  Again,  long-time  loans  usually 
command  a  slightly  lower  rate  than  short-time  loans, 
because  with  such  loans  the  lender  is  saved  the  trouble  of 
frequent  reinvestment.  Aside  from  these  conditions,  more- 
over, a  steady  diminution  of  pure  or  net  interest  occurs  in 
most  civilized  countries.  This  last  change  is  due,  not  to 
lessened  risk,  but  to  the  change  in  mental  comparisons 
between  present  and  future  goods.  Present  wants,  being 
better  satisfied,  are  less  clamorous  and  contrast  less  vividly 
with  future  wants.  Moreover,  providence  increases  with 


INTEREST  299 

civilization.  The  lowering  of  the  pure  interest  rate  means 
that  the  great  body  of  people  are  both  less  needy  in  the 
present  and  more  thoughtful  of  the  future. 

Usury. — The  word  "usury,"  once  applied  to  all  interest, 
is  now  applied  only  to  interest  in  excess  of  the  rate 
allowed  by  law.  The  question  of  whether  laws  should  be 
framed  limiting  the  rate  to  be  received  and  fixing  pen- 
alties for  violation,  has  been  much  discussed.  Economists 
are  generally  agreed  that  the  State  should  not  attempt  to 
establish  a  rate,  except  so  far  as  it  can  confine  the  action 
of  the  law  to  loans  to  the  needy  for  personal  consump- 
tion. One  effect  of  usury  laws  is  worthy  of  special 
notice.  When  the  law  has  established  a  fixed  rate,  under 
penalties,  it  may  happen  that  law-abiding  people  will  be 
unwilling  to  make  loans  at  the  legal  rate,  and  that  those 
who  are  willing  to  violate  the  laws  will  thus  have  an 
added  reason  for  charging  a  higher  rate  than  they  other- 
wise would.  Competition  among  lenders  is  lessened,  and 
the  risk  of  loaning  is  increased.  Both  these  items  act  in 
the  direction  of  excessive  rates.  Though  many  countries 
have  laws  designed  to  prevent  the  taking  of  excessive 
interest,  the  commercial  world,  which  is  regulated  in  great 
measure  by  the  honor  of  the  business  men,  commonly  pro- 
ceeds in  disregard  of  the  law's  penalties.  Those  who  bor- 
row at  excessive  rates  do  so  willingly  and  knowingly,  and 
are  in  honor  bound  not  to  appeal  to  the  law  to  escape 
their  just  debts. 


300       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


SUMMARY 

1.  Interest  is  the  reward  paid  for  the  use  of  capital. 

2.  Capital  differs  from  land  in  that  it  is  produced.    Social  capital 

consists  of  all  producers'  goods. 

3.  Speaking  generally,  interest  is  determined  by  the  relation  between 

the  supply  of  capital  and  the  demand  for  it,  at  a  point  or  rate 
which  equalizes  the  supply  and  the  demand. 

4.  The  demand  for  capital  depends  upon  its  productiveness,  the 

value  of  its  product. 

5.  The  supply  of  capital  depends  in  general  upon  its  cost  of  produc- 

tion, i.e.  upon  the  sacrifice  involved  in  the  abstinence  of  the 
marginal  saver  or  investor. 

6.  The  cost  of  abstinence  arises  from  the  fact  that  men  regularly 

value  more  highly  the  present  as  compared  with  the  future,  and 
the  cost  is  therefore  measured  by  the  extent  of  this  higher 
valuation. 

7.  Capitalistic  production  is  more  productive  than  non-capitalistic 

production  because  it  enables  men  to  substitute  indirect  pro- 
cesses for  direct  ones,  and  thus  enables  men  to  use  natural 
forces. 

8.  Long-time  loans  and  short-time  loans,  while  affected  by  different 

sets  of  conditions,  tend  to  have  the  same  rate  of  return,  and 
this  rate  is  also  that  for  the  loans  of  other  goods  which  are 
not  capital. 

9.  The  interest  rate,  as  ordinarily  stated,  really  measures  the  return 

for  risk  as  well  as  the  return  for  capital,  which  is  pure  interest. 
Both  gross  interest  and  pure  interest  tend  to  fall  with  advanc- 
ing civilization. 

10.  Usury,  now  applied  to  interest  in  excess  of  a  legal  rate,  is  fre- 
quently made  subject  to  penalty.  Such  penalty,  however,  usu- 
ally has  the  effect  of  raising  rather  than  lowering  real  interest. 

QUESTIONS 

1.  What   are    the    differences   between    capital    and  land?     The 

resemblances  ? 

2.  What  is  interest?     How  was  the  taking  of  interest  regarded  in 

early  times  ? 


INTEREST  301 

3.  What  is  the  supply  and  demand  theory  of  interest?    What  is  the 

productivity  theory?  What  element  of  truth  does  it  contain? 
What  is  the  abstinence  theory  ?  What  element  of  truth  does 
it  contain  ?  What  is  the  Austrian  theory  ?  Are  these  theories 
necessarily  contradictory  ? 

4.  State  in  summary  form  the  complete  theory  of  interest. 

5.  Why  is  it  right  to  say  that  the  cost  of  capital  is  abstinence? 

What  is  meant  by  marginal  investment?  How  do  relative 
valuations  of  present  and  future  compare  in  the  case  of  chil- 
dren and  adults?  Of  children  and  savages  ?  Of  rich  and  poor  ? 
What  relation  has  this  to  interest  ? 

6.  Show  in  detail  the  services  rendered  to  production  by  capital. 

7.  What  different  loan  markets  are  to  be  distinguished  ?    How  does 

the  interest  rate  in  the  first  affect  that  in  the  second  ?  How  is 
the  "  rent "  of  houses  determined  ? 

8.  What  two  elements  are  there  in  the  ordinary  interest  rate  ?  What 

is  pure  interest?  What  two  reasons  are  there  for  a  fall  in  the 
interest  rate  with  advancing  civilization  ? 

9.  What  is  usury?    What  are  usury  laws?    In  what  case  are  usury 

laws  beneficial  ? 

LITERATURE 

See  list  of  works  cited  at  close  of  Chapters  II  and  III.     Also :  — 
Bohm-Bawerk,    E.  von:    Capital  and  Interest,   Translator's  Preface, 

pp.  xix-xx;  also  Positive  Theory  of  Capital,  Bk.  V,  Ch.  Ill, 

pp.  253-259. 

Clark,  .1.  B. :  The  Distribution  of  Wealth,  Ch.  XII,  pp.  182-187. 
Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  Ill,  Ch.   XXIII, 

§§  2  and  4. 
Walker,  F.  A. :  Political  Economy,  Part  IV,  Ch.  Ill,  pp.  218-232,  and 

Part  VI,  §  1. 
All  standard  works  on  Economics  discuss  these  topics. 


CHAPTER   V 
PROFITS 

ECONOMISTS  recognize  a  fourth  regular  share  in  the  dis- 
tribution of  the  social  income,  though  they  have  not  been 
agreed  as  to  precisely  what  this  share  consists  of,  or  as  to 
how  it  is  determined.  Some  writers  have  used  the  word 
"profits "to  denote  the  total  return  to  the  entrepreneur  from 
the  sale  of  his  product,  after  the  payment  of  wages  for 
labor  employed  and  a  further  payment  for  land  and  capi- 
tal hired.  It  is  evident,  however,  that  this  return  is  not 
a  simple  one,  but  contains  payments  for  several  elements 
which  call  for  separate  treatment.  We  shall  therefore 
speak  of  this  return  as  gross  profits,  and  inquire  of  what  it 
consists,  thus  leading  the  way  to  an  understanding  of  the 
net  return  which  may  be  called  pure  or  net  profit. 

I.  Rewards  to  Other  Factors  of  Production. — 1.  Interest. 
In  the  first  place,  it  is  evident  that  the  return  which  the 
entrepreneur  receives  is  in  part  due  to  the  factors  of  pro- 
duction which  he  himself  owns  and  uses  in  the  business. 
The  return  to  his  capital  invested  is  really  interest,  as 
truly  as  if  it  were  to  be  paid  to  another  person  who  owned 
the  capital  instead  of  to  the  entrepreneur  owner  himself. 
In  estimating  net  profits,  therefore,  careful  bookkeeping 
will  deduct  from  gross  profits  interest  on  capital  invested 
by  the  entrepreneur. 

302 


PROFITS  303 

2.  Rent, — The  same  thing,  of  course,  holds  true  of  land 
owned  by  the  entrepreneur.     Rent  should  be  charged  off 
in  the  same  way  as  to  an  outside  owner. 

3.  Wages,  including    Wages  of  Superintendence.  —  The 
element  of  wages  and  salaries  of  every  sort,  including  a 
regularly  estimated  amount  for  the   entrepreneur  himself, 
should  also  for  scientific  purposes  be  separated  from  gross 
profits  in   the   calculation  of  net  profits.      Private  and 
public  corporations  do  this   regularly,  and   the   practice 
is  frequent   in   those  large   non-corporate   businesses   in 
which  the  entrepreneur  is  employed  just  as  is  any  other 
laborer. 

II.  Charges  of  Maintenance.  —  1.  Depreciation  Fund. 
In  the  second  place,  deduction  must  be  made  from  gross 
profits  of  a  sum  sufficient  to  provide  for  the  maintenance 
of  the  capital,  or  its  replacement,  as  it  is  gradually  used 
up,  or  as  it  is  suddenly  destroyed.  Modern  business  book- 
keeping commonly  provides  for  the  replacement  of  grad- 
ual impairment  by  keeping  a  separate  account  for  what 
is  called  a  maintenance  or  depreciation  fund.  A  man  is 
facing  business  ruin  who  takes  and  consumes  as  profits 
from  his  plant  what  should  be  set  aside  for  its  replace- 
ment. 

2.  Insurance.  —  The  same  may  be  said  of  the  payment 
to  provide  against  risk,  which  may  be  called  insurance. 
The  amount  of  money  which  a  careful  business  man  sets 
aside  to  secure  himself  against  loss  is  not  profit.  Insur- 
ance in  this  sense  is  much  broader  than  insurance  against 
fire,  hail,  etc.,  for  which  a  policy  may  be  taken  out  and  a 
definite  premium  paid.  It  must  be  noticed  that  when  a 
separate  charge  is  made  to  cover  such  risk,  the  allowance 
for  interest  on  the  capital  must  leave  out  the  part  due  to 


304        ELEMENT AET  PRINCIPLES   OF  ECONOMICS 

risk  which  we  have  seen  to  be  present  in  gross  or  market 
interest ;  in  other  words,  the  interest  will  in  such  a  case 
be  the  pure  interest. 

III.  Extra-personal  Gains. — 1.  Monopoly  Crams.  Even 
with  all  these  deductions,  the  analysis  is  not  complete. 
We  must,  in  the  third  place,  deduct  extra-personal  gains 
—  gains  which  are  not  due  to  the  efficiency  of  the  mana- 
ger. One  of  these  sources  of  gain  lies  in  the  possession 
of  a  monopoly  advantage.  Monopoly  gains  are  a  separate 
item  in  distribution,  and  if  they  are  to  be  called  profits, 
as  they  frequently  are,  we  must  carefully  distinguish  the 
particular  nature  of  such  profits. 

2.  Conjunctural  Grains.  —  Closely  resembling  monopoly 
gains  in  certain  respects  is  a  class  of  gains  known  in  recent 
discussions  as  conjunctural.  As  the  name  indicates,  these 
are  extra-personal  gains  resulting  from  a  favorable  con- 
juncture of  circumstances  which  could  not  have  been  fore- 
seen. A  simple  instance  of  such  a  gain  is  seen  in  the 
profits  made  by  retail  dealers  when  the  sudden  death  of  a 
great  personage  creates  unusual  demand  for  mourning 
goods.  That  this  happened  in  many  American  cities  at 
the  time  of  the  death  of  President  McKinley  is  shown  by 
statements  in  the  press  of  those  places.  Stocks  of  black 
goods  which  the  merchant  may  have  censured  himself  for 
accumulating  may  suddenly  become  the  source  of  a  con- 
siderable conjunctural  gain.  Here,  however,  a  very  real 
difficulty  presents  itself.  In  instances  like  that  just  men- 
tioned, the  conjunctural  element  can  be  plainly  distin- 
guished. But  it  often  happens  that  such  gains  are  at  least 
in  part  the  reward  of  foresight  and  energy,  and  are  there- 
fore to  be  classed  as  pure  or  net  profit.  The  man  who  makes 
a  fortune  by  buying  up  suburban  property  in  an  unlikely 


PROFITS  305 

neighborhood,  because  he  has  had  sufficient  sagacity  to 
foresee  growth  of  population  in  that  direction,  may  claim 
with  some  reason  that  his  gain  is  not  conjunctural.  Even 
more  reasonable  would  his  claim  be  if,  after  buying  the 
property,  he  himself  directed  the  movement  of  population 
in  that  direction  by  securing  improved  rapid  transit  facili- 
ties and  by  other  familiar  expedients.  In  real  life  all  the 
stages  between  clever  business  foresight  and  pure  con- 
juncture are  to  be  observed. 

IV.  Pure  or  Net  Profits.  —  Our  analysis,  then,  gives  us 
as  our  concept  of  pure  or  net  profits  all  that  is  left  after 
deducting  the  items  mentioned.  Of  course  it  will  be 
understood  that  not  every  business  shows  in  its  gross 
profits  all  these  different  items.  Sometimes  it  may  even 
happen  that  there  need  be  no  further  deductions  than 
those  for  wages  and  a  maintenance  fund.  But  some  of 
the  other  items  are  usually  present  in  the  estimate  of 
gross  profits. 

Society  must  at  any  time  pay  for  its  goods  a  price  suffi- 
cient to  give  even  the  most  inefficient  manager  whose  services 
are  necessary  to  the  production  of  the  supply,  an  amount 
covering  the  items  other  than  net  profits.  But  no  pure  or 
net  profits  will  accrue  to  such  a  marginal  entrepreneur. 
More  efficient  managers  will,  therefore,  be  able  to  secure 
differential  profit,  the  amount  of  the  differential  in  every 
case  being  determined  by  the  extent  to  which  these  entre- 
preneurs individually  surpass  in  efficiency  the  entrepre- 
neurs of  only  marginal  efficiency.  Pure  or  net  profit, 
therefore,  is  a  purely  personal  gain  —  a  return  to  superi- 
ority of  management  as  such,  independently  of  monopoly 
advantage,  favorable  conjuncture,  or  the  mere  labor  of 
the  manager  as  a  superintendent. 


306        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 


Summary.  —  Let  us   summarize   diagrammatically  the 
considerations  just  presented :  — 


Reward  to  f  Interest  on  entrepreneur's  capital, 

other  factors  \  Rent  of  entrepreneur's  land, 
of  production  I  Wages  for  entrepreneur's  service. 


GROSS  PROFITS 


Charges  of  (  Depreciation  fund  charge, 

maintenance    < Insurance  fund  charge. 


Extra-personal 
gains 


(  Monopoly  gains. 
(  Conjunctural  gains. 


Net  profit —        <  „._          .  .  _, 

_  .        •<  Differential  or  pure  profits. 

Personal  gains     ( 


Pure  Profit  and  Rent  Compared.  —  This  explanation  of  the 
determination  of  pure  profit  as  a  surplus  due  to  the  superiority 
of  a  given  entrepreneur  over  the  marginal  or  poorest  entre- 
preneur who  can  afford  to  stay  in  business  at  the  current  price 
of  the  product,  is,  as  the  student  will  doubtless  have  noticed, 
strikingly  like  the  explanation  of  the  determination  of  rent. 
Thus,  while  wages  and  interest  are  price  determining,  entering 
into  the  price  of  the  product,  rent  and  profits  are  price  deter- 
mined; they  do  not  enter  into  the  price  of  the  product.  Pure 
profit  has  hence  been  called,  not  inaptly,  personal  rent,  or  the 
rent  of  superior  managing  ability.  Again,  as  with  rent,  it  is 
interesting  to  notice  the  corollary  that  it  is  not  the  able  man- 
agers, receiving  large  pure  profit,  any  more  than  the  fertile 
land,  receiving  large  rent,  that  make  the  prices  of  commodi- 
ties high.  If  all  land  were  of  the  highest  grade  of  fertility, 
the  price  of  produce  would  be  lessened ;  and  in  the  same  way, 
if  all  managers  were  of  the  same  order  of  talent  as  our  ablest 
managers,  goods  would  be  produced  at  a  lower  marginal  ex- 
pense, and  society  would  reap  the  benefit  in  lower  prices.  But 
there  is  this  marked  difference  between  the  rent  of  land  and 
pure  profits.  The  more  fertile  lands  can  exercise  little  influ- 
ence in  raising  the  quality  of  inferior  soils,  while  superior 
entrepreneurs  are  always  tending  to  make  the  knowledge  and 


PROFITS  307 

skill  requisite  for  success  a  matter  of  common  property.  As 
business  becomes  more  completely  organized,  falling  more  and 
more  into  routine ;  as  knowledge  becomes  more  widely  diffused 
throughout  the  business  community;  and  as  governments  im- 
prove in  regularity  and  firmness  and  honesty,  the  marginal 
expense  of  production  and  the  resulting  prices  tend  to  fall,  and 
profits  in  consequence  tend  to  lower  and  lower  limits.  It  is 
in  this  sense  that  profits  may  be  spoken  of  as  "  the  lure  that 
insures  improvement." 

Pure  Profit  and  Monopoly  Gains  Contrasted.  —  Under 
sharp  and  increasing  competition,  pure  profit  rests  upon 
a  precarious  foundation.  If  the  special  ability  upon 
which  the  profit  depends  is  such  as  cannot  be  duplicated, 
the  profit  will  perish  with  the  single  possessor;  if  the 
special  ability  can  be  duplicated,  rival  concerns  will  pos- 
sess themselves  of  entrepreneurs  of  equal  efficiency,  and 
the  special  advantage  tends  to  disappear  through  compe- 
tition. But,  as  we  have  said,  there  are  certain  permanent 
extra-personal  advantages,  entirely  equivalent  otherwise 
to  natural  ability,  which  may  become  the  exclusive  and 
permanent  property  of  a  business  organization.  In  case 
of  such  possession,  competition  is  either  entirely  impos- 
sible or  it  is  possible  only  on  terms  which  give  to  the 
holder  of  the  monopoly  advantage  a  considerable  differen- 
tial return.  Such  monopoly  advantage  exists  in  the  pos- 
session of  peculiarly  favored  spots  or  lines  of  land,  or  of 
exclusive  guaranteed  privileges,  etc.  When  such  an 
advantage  is  enjoyed,  the  power  of  competition  over 
price  is  removed ;  prices  no  longer  stand  at  the  point  of 
cost ;  and  a  surplus  over  rent,  wages,  interest,  and  profits 
is  a  regular  result.  Unless  interfered  with  by  legislation, 
there  could  be  no  outside  influence  to  prevent  a  monopoly 


308       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

asking  any  price  it  pleased,  subject  only  to  the  action  of 
the  law  of  monopoly  price  which  has  been  explained  in 
the  chapter  on  Monopolies. 

Another  sharp  contrast  between  pure  profits  and  mo- 
nopoly gains  lies  in  the  fact  that  whereas  pure  profit  is  a 
surplus  produced  by  superior  efficiency,  and  is  in  so  far  no 
burden  to  the  community,  —  which,  indeed,  tends  to  gain 
by  it  in  the  end,  —  monopoly  profit,  on  the  other  hand,  is 
a  surplus  extorted  by  power  and  privilege,  and  is  usually 
a  source  of  loss  to  the  community.  Distribution  of  wealth 
is  coming  increasingly  under  the  influence  of  monopoly. 
The  economic  surplus  taken  by  monopoly  is  the  source  of 
many  of  the  largest  fortunes  of  our  day,  and  is  one  of  the 
main  causes  of  the  growing  inequalities  of  fortune,  espe- 
cially since  our  Civil  War.  While,  in  general,  competition 
increases  in  severity,  an  increasing  proportion  of  the  indus- 
trial field  is  withdrawn  from  competition  and  falls  under  the 
control  of  monopoly. 

Capital  and  Capitalization.  —  In  considering  monopoly 
gains,  it  is  important  to  understand  the  distinction  be- 
tween capital  and  capitalization.  Capitalization  means  the 
amount  at  which  a  business  or  property  is  valued.  The 
word  is  therefore  used  in  the  language  of  the  market  in 
two  ways.  It  is  sometimes  used  to  describe  the  par  value 
of  the  stock  and  other  securities  issued  by  the  company, 
as  representing  the  company's  nominal  valuation  of  the 
business  and  its  earning  power.  And  it  is  also  used  to 
denote  the  market  value  of  the  business  or  of  its  securi- 
ties taken  as  a  whole.  Thus  a  company  may  be  capital- 
ized at  $10,000,000  in  the  sense  that  its  securities  have 
that  par  value,  while  the  market  estimate  of  the  value  of 
the  business,  as  reflected  in  the  prices  paid  for  its  securi- 


PROFITS  309 

ties,  may  be  much  less  or  much  more  than  $10,000,000. 
Capitalization  in  either  of  these  two  senses  may  be  many 
times  the  amount  of  capital  actually  invested,  since  it  is 
based  not  on  investment  or  material  cost,  but  upon  earn- 
ing power. 

When  we  speak  of  current  interest  as  being  5  per 
cent,  we  mean  that  free  and  disposable  capital  can  regu- 
larly command  that  rate  of  return  in  competitive  industry. 
Let  us  suppose  that  the  return  on  investments  that  are 
open  to  all  is  about  5  per  cent,  but  that  the  annual  re- 
turn to  a  great  oil  company,  which  has  actually  invested 
$100,000,000  in  the  business,  is  50  per  cent.  The  busi- 
ness may  in  that  case  be  capitalized  at  $1,000,000,000,  in 
such  a  way  that  the  great  earnings  on  the  actual  invest- 
ment will  appear  as  only  5  per  cent  on  the  capitalization. 
To  those  who  are  ignorant  of  the  difference  between  capi- 
tal and  capitalization,  monopolies  can  often,  by  such  a 
plan  as  this,  appeal  successfully  for  sympathy  and  support 
on  the  ground  of  insufficient  earnings,  even  when  the 
return  on  their  actual  investment  is  many  times  the 
market  rate. 

As  profits  on  new  investments  in  competitive  industries 
fall,  the  capitalization  of  monopoly  earnings  may  be  raised 
in  proportion,  even  without  the  investment  of  new  capi- 
tal. For  instance,  if  a  monopoly  has  an  earning  power  of 
•150,000  a  year,  the  capitalization  of  this  return  at  5  per 
cent  would  stand  at  $1,000,000.  If,  then,  the  current  rate 
of  interest  should  fall  to  4  per  cent,  while  the  monopoly 
earnings  suffered  no  change,  the  capitalization  of  the 
monopoly,  represented  by  the  market  value  of  its  securi- 
ties, would  rise  to  $1,250,000. 

And  yet  it  must  be  remembered  that  the  owners  of  the 


310        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

stock  of  monopolistic  businesses  often  include  many  per- 
sons who  have  paid  on  the  basis  of  the  capitalized  value, 
and  who  do  not  therefore  receive  from  the  monopoly  a 
greater  return  than  they  would  receive  from  investments 
in  competitive  industry.  It  is  those  who  "get  in  on  the 
ground  floor,"  and  who  are  thus  enabled  to  sell  at  the 
capitalized  value  stock  which  they  have  received  on 
the  basis  of  actual  investment,  who  divide  among  them 
the  capitalized  monopoly  earnings. 

SUMMARY 

1.  The  word  "  profits  "  as  ordinarily  used  in  business  often  includes 

many  elements  of  income  which  are  not  really  profits.  The 
total  surplus  left  in  the  employer's  hands  after  the  payment  of 
contract  wages,  rent,  and  interest  should  be  called  gross  profits. 

2.  To  obtain  the  net  profits  of  a  business  there  must  be  subtracted 

from  the  gross  profits  (1)  a  normal  return  for  the  employer's 
own  capital,  land,  and  services,  i.e.  interest,  rent,  and  wages  of 
superintendence ;  (2)  charges  of  maintenance,  including  depre- 
ciation and  insurance ;  (3)  extra-personal  gains,  including  those 
arising  from  monopoly  or  from  chance. 

3.  The  remainder,  or  the  pure  net  profit,  is  a  differential  return  due 

to  the  superior  ability  of  the  entrepreneur,  and  is  in  many 
respects  comparable  to  rent. 

4.  Pure  profits  tend  to  diminish,  other  things  being  equal,  as  educa- 

tion becomes  more  widely  diffused  and  as  industry  becomes 
more  completely  organized  under  regular  routine. 

5.  Monopoly  profits,  on  the  other  hand,  have  a  more  permanent  char- 

acter in  the  absence  of  government  interference. 

6.  Under  the  modern  conditions  of  business,  monopoly  profits  are 

disguised  by  their  form  of  capitalization. 

QUESTIONS 

1.   What  are  gross  profits?     What  is  the  difference  between  gross 
profits  and  pure  profits? 


PROFITS  31i 

2.  Name  the  deductions  that  must  be  made  from  gross  profits  to 

arrive  at  net  profits. 

3.  What  three  deductions  should  be  grouped  together  ?    What  other 

two  groups?     What  is  the  basis  of  this  grouping? 

4.  What  is  meant  by  wages  of  superintendence  ?    Some  writers  call 

wages  of  superintendence  marginal  profits  :  explain. 

5.  What  is  the  depreciation  fund?     Insurance  fund? 

6.  What  are  the  two  classes  of  extra-personal  gains  ?    What  is  meant 

by  the  word"conjunctural"?  Mention  instances  of  conjunctural 
gains  that  have  fallen  under  your  observation  or  that  you  have 
met  with  in  reading. 

7.  What  caution  must  be  observed  in  estimating  conjunctural  profits  ? 

8.  Why  are  pure  profits  like  rent  ?     How  do  pure  profits  and  rent 

compare  as  to  their  tendency  to  increase  or  decrease  ?  What 
effect  does  competition  have  in  the  long  run  on  pure  profits? 
On  monopoly  profits? 

9.  Why  is  it  that  monopoly  profits  often  appear  to  be  only  equal  to 

the  normal  interest  rate  ?  What  bearing  does  this  have  upon 
popular  opinion  regarding  monopolies? 

10.  What  is  the  difference  between  capital  and  capitalization  ?    Ex- 

plain the  process  of  capitalization. 

11.  What  is  the  effect  of  a  falling  interest  rate  upon  the  share  of  the 

social  income  that  goes  to  monopolies?  Why?  What  is  the 
effect  upon  the  value  of  a  monopoly  privilege  ? 

12.  What  bearing  has  this  upon  the  question  of  the  attitude  which 

the  people  should  assume  toward  monopolies  ? 

LITERATURE 

See  note  on  literature  at  close  of  preceding  chapter.    Also: — 
Ely,  R.  T. :  Monopolies  and  Trusts,  Ch.  III. 
Jenks,  J.  W. :  The  Trust  Problem. 

Meade,  E.  S. :  Trust  Finance.     Use  Index  under  "  Profits." 
Report  of  the  United  States  Industrial  Commission,  Vol.  XIX,  pp. 
724-730. 

Some  of  the  questions  treated  in  this  chapter  have  been  the  subject 
of  constant  discussion  in  the  newspapers  and  magazines  of  recent 
years. 


CHAPTER  VI 
SOCIALISM 

The  Relation  of  Socialism  to  Distribution.  —  In  the  fore- 
going chapters  we  have  explained  how  in  the  existing 
social  organization  the  annual  produce  of  industry  —  the 
social  income  —  is  distributed.  As  was  stated  at  the 
beginning,  the  method  of  distribution  is  intimately  de- 
pendent upon  the  legal  structure  of  society,  and  particu- 
larly upon  the  laws  of  property.  Society,  as  it  exists  in 
all  advanced  nations,  accepts  private  property  as  its  indus- 
trial basis.  In  other  words,  in  the  greater  part  of  goods, 
private  proprietorship  or  private  appropriation  is  not  only 
permitted  but  encouraged,  and  the  result  is  the  system  of 
distribution  which  has  been  described. 

Considerable  differences  in  property  laws  exist  among 
different  nations,  and  minor  changes  are  constantly  being 
made ;  and  these  differences  and  changes  result  in  cor- 
responding differences  and  changes  in  distribution.  It 
would  take  us  too  far  afield  to  attempt  to  treat  these  in 
detail.  But  socialism,  which  is  a  plan  to  overthrow  the 
very  foundation  of  our  existing  industrial  organization, 
has  been  so  seriously  proposed  and  discussed,  and  has  to- 
day so  many  enthusiastic  advocates,  that  we  cannot  pass  it 
over  in  silence  in  our  analysis  of  economic  theory. 

Such  a  fundamental  change  as  socialists  propose  would, 
as  will  appear  in  the  following  pages,  profoundly  affect 

312 


SOCIALISM  313 

every  one  of  the  four  phases  of  economic  activity  which 
we  have  chosen  as  the  natural  divisions  of  economic  analy- 
sis,—  consumption,  production,  exchange,  and  distribu- 
tion. But  socialism  has  been  proposed  more  especially  as 
a  remedy  for  existing  evils  in  the  distribution  of  the  social 
income,  and  we  may  therefore  properly  treat  the  subject 
under  that  head.  It  may  be  noted  in  passing,  moreover, 
that  in  general  discussions  of  the  proposed  change,  it  is  a 
common  assumption  that  labor  and  wages  would  be  espe- 
cially affected,  and  socialism  is  therefore  often  treated  in 
direct  connection  with  the  subject  of  wages  and  plans  for 
improving  the  status  of  labor. 

General  Characterization.  —  In  the  chapter  on  Wages 
and  the  Labor  Problem  we  have  described  some  of  the 
various  changes  in  the  relation  of  the  laborer  to  the  prod- 
uct of  his  labor  that  have  been  tried  or  proposed.  It  was 
there  pointed  out  that  one  of  these  plans,  cooperation,  may 
be  either  voluntary  or  coercive,  —  that  is,  ordered  and  con- 
trolled by  the  State,  —  and  it  was  further  stated  that  coer- 
cive cooperation  is  but  another  name  for  socialism.  What, 
then,  is  socialism?  It  is  coercive  cooperation,  not  merely 
for  undertakings  of  a  monopolistic  nature,  but  for  all  impor- 
tant productive  enterprises.  Socialists  seek  the  establish- 
ment of  industrial  democracy  through  the  agency  of  the 
State,  which  they  hold  to  be  the  only  means  of  attaining 
their  end.  They  would  expand  the  business  functions  of 
government  until  all  the  dominating  kinds  of  business  are 
absorbed.  They  would  have  all  such  business  regulated  by 
the  people  in  their  organic  capacity,  every  man  and  every 
woman  having  essentially  the  same  rights  that  any  other 
man  or  woman  has.  Our  political  organization  would 
become  also  an  industrial  organization,  with  universal 


314        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

suffrage.  Private  property  in  profit-producing  business 
and  rent-producing  land  would  be  abolished,  though  pri- 
vate property  in  incomes  would  in  the  main  be  retained. 
What  is  desired  by  the  socialist,  then,  is  not,  as  is  sup- 
posed by  the  uninformed,  a  division  or  diffusion  of  prop- 
erty, but  rather  a  further  concentration  of  a  very  large 
part  of  property.  The  socialists  do  not  complain  because 
productive  property  is  too  much  concentrated,  but  because 
it  is  not  concentrated  enough.  They  therefore  rejoice  in 
the  formation  of  trusts  and  combinations,  regarding  these 
as  a  development  in  the  desired  direction. 

The  Four  Elements  of  Socialism. — There  are  four  char- 
acteristic elements  in  pure  socialism :  first,  the  common 
ownership  of  the  means  of  production;  second,  the  common 
management  of  the  means  of  production  ;  third,  the  distribu- 
tion of  the  product  of  industry  by  common  authority  ;  fourth, 
private  property  in  the  greater  part  of  income.  Socialists 
make  no  war  on  capital,  strictly  speaking.  What  social- 
ists object  to  is  not  capital,  but  the  private  capitalist. 
They  desire  to  socialize  capital  and  to  abolish  capitalists 
as  a  distinct  class  by  making  everybody,  as  a  member  of 
the  community,  a  capitalist ;  that  is,  a  part  owner  of  sub- 
stantially all  the  capital  in  the  country. 

In  support  of  this  plan,  socialists  generally  claim  that 
labor  creates  all  wealth.  No  rational  socialist  means  by 
this  to  deny  that  land  and  capital  are  factors  of  produc- 
tion ;  but  as  these  are  only  passive  factors,  the  socialist 
holds  that  the  owners  of  those  factors  should  not  receive 
a  share  of  the  product  simply  through  such  ownership. 
Man  is  the  only  active  factor,  and  all  production  is  car- 
ried on  for  the  sake  of  man.  Socialists  admit  that  with 
industry  organized  as  at  present,  the  owners  of  land  and 


SOCIALISM  315 

capital  must  receive  a  return  for  them ;  hence  they  desire 
that  these  tools  should  become  social  property. 

Distributive  Justice. — The  central  aim  of  socialism,  its 
pivotal  point,  is  distributive  justice.  While  it  seeks  to 
increase  production  by  more  efficient  organization  and 
methods,  it  makes  its  central  thought  the  just  distribu- 
tion of  the  product.  The  ideas  of  socialists  as  to  what 
constitutes  justice  in  distribution  are  not  harmonious. 
Some  say  that  (1)  equality  meets  the  demands  of  justice; 
others,  (2)  distribution  in  proportion  to  real  needs,  so  that 
each  man  may  have  the  economic  means  for  his  fullest 
individuation,  or  development ;  while  still  others  say  that 
justice  demands  distribution  (3)  in  proportion  to  merit  or 
service  rendered  —  but  the  service  of  the  individual,  not  of 
his  ancestors. 

Socialism  an  Extension  of  Existing  Institutions.  —  Our 
government  owns  and  manages  the  postal  service ;  nearly 
all  governments  own  the  telegraph;  nearly  all  own  the 
wagon  roads ;  some  own  canals  and  railways ;  many  even 
own  factories,  and  probably  every  national  government 
does  at  least  a  little  manufacturing ;  many  of  them  also 
cultivate  forests,  and  some  cultivate  arable  lands.  In 
brief,  we  may  say  that  governments  already  touch  the 
business  world  in  the  following  ways :  (1)  they  protect 
person  and  property  ;  (2)  create  and  guarantee  certain  spe- 
cial privileges  and  franchises ;  •  (3)  regulate  the  terms  of 
contract  and  of  competition ;  (4)  participate  in  private  en- 
terprises  by  favorable  tariffs,  bounties,  subsidies,  land  gifts, 
etc. ;  (5)  carry  on  certain  industrial  processes,  such  as  the 
building  and  maintenance  of  roads,  parks,  lighthouses, 
telegraph,  money  coinage,  etc.  To  picture  to  ourselves 
socialism  pure  arid  simple,  therefore,  we  have  only  to 


316       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

imagine  an  extension  of  what  already  exists  until  a  point 
is  reached  where  society,  through  its  government,  culti- 
vates the  land,  manufactures  the  goods,  conducts  the  ex- 
changes, and  in  short  carries  on  most  productive  enterprises. 
Only  such  private  industry  would  be  permitted  as  would 
not  threaten  the  dominating  power  of  society  in  produc- 
tion and  distribution.  Thus  individuals  would  probably 
be  permitted  to  cultivate  small  areas  of  land,  and  there 
might  exist  here  and  there  a  private  press  supported  from 
private  income. 

Not  all  Public  Business  is  Socialistic.  —  It  must  be  ob- 
served that  not  every  public  activity  in  relation  to  in- 
dustry is  socialistic.  Properly  speaking,  that  only  can 
be  considered  socialistic  which  tends  to  render  government 
dominant  in  all  production.  Does  any  proposed  measure 
tend  to  the  suppression  of  production  by  individuals  or 
by  voluntary  cooperation,  and  to  the  absorption  of  pro- 
duction by  government?  Then  it  is  socialistic;  other- 
wise it  is  not.  This  is  the  only  way  to  distinguish 
between  socialistic  and  non-socialistic,  or  even  anti-social- 
istic measures.  It  furnishes  us  with  a  rational  basis  for 
judgment.  Are  compulsory  education  and  free  schools 
socialistic  ?  By  our  test  they  are  decidedly  anti-socialistic. 
By  developing  capacity  for  self-help,  they  enable  those 
who  grow  up  under  their  influence  to  make  the  best  of 
existing  institutions.  They  are  a  conservative  force. 
Is  municipal  ownership  of  gasworks,  electric-lighting 
works,  or  other  natural  monopolies,  socialistic  ?  No ;  for 
they  are  in  line  with  the  modern  tendency  to  separate 
sharply  the  proper  industrial  functions  of  private  persons 
from  the  proper  industrial  functions  of  the  politically 
organized  community.  There  is  a  sound  principle  —  not 


SOCIALISM  317 

socialistic  —  underlying  the  modern  tendency.  The  con- 
viction is  gradually  being  forced  upon  us  by  science  and 
by  actual  experience  that  most  of  those  industries  which 
are  natural  monopolies  must  in  the  end  be  owned  and 
operated  by  government,  and  that  outside  the  field  of 
natural  monopoly  there  is  a  sharply  denned  territory  in 
which  business  can  flourish  only  in  the  atmosphere  of 
private  enterprise  and  competition.  If  we  separate  thus 
frankly  and  rationally  the  private  from  the  public  indus- 
trial sphere,  we  lay  the  strongest  possible  foundations  for 
the  existing  industrial  order,  instead  of  allowing  things 
to  drift  haphazard  into  socialism  or  chaos. 

Socialism  makes  perhaps  its  strongest  claims  in  its  plea, 
first,  for  a  scientific  organization  of  the  productive  forces  of 
society,  and  second,  for  a  just  distribution  of  the  social 
income  from  production. 

1.  The  Relation  of  Socialism  to  Production.  —  When  the 
opponent  of  socialism  objects  to  that  system  on  the  ground 
that  more  equal  division  of  the  social  income  would  result 
in  pitifully  small  portions  for  individuals,  the  socialist 
replies  :  "  There  is  little  to  divide  now,  naturally  enough. 
Competition  is  wasteful.  Two  railways  run  where  one 
would  suffice.  Three  times  as  many  milk  wagons,  horses, 
and  drivers  are  required  to  serve  the  people  with  milk  as 
would  suffice  if  the  milk  business  were  organized  on  the 
plan  of  the  mail-distribution  business  in  cities.  Look  at 
the  stores,  wholesale  and  retail,  and  note  the  waste  of 
human  force.  Millions  of  dollars  are  annually  expended 
in  advertising,  which  would  be  saved  in  the  socialistic 
state.  Without  competition  the  whole  drygoods  and 
grocery  businesses  could  be  carried  on  with  a  third  of  the 
present  expenditure  of  economic  energy.  Reflect,  too, 


318       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

on  all  the  idle  classes  in  society,  the  idle  rich  and  the  idle 
poor.  Socialism  would  find  a  place  for  every  one,  and 
would  put  every  one  in  his  right  place,  and  by  making 
each  one  dependent  on  his  own  exertions  for  success, 
would  stimulate  all  energies."  The  socialistic  argument, 
continued  indefinitely  after  this  same  fashion,  is  a  really 
telling  one.  It  does  not  prove  the  point,  however,  unless 
we  grant  three  things  :  first,  that  present  waste  and  idle- 
ness cannot  be  suppressed  or  greatly  diminished  without  de- 
parting from  the  fundamental  principles  of  our  existing 
industrial  order ;  second,  that  in  the  advantages  of  com- 
petition there  are  not  social  gains  which  more  than  outweigh 
the  social  losses  just  described;  and  third,  that  socialism  is 
practicable. 

2.  The  Relation  of  Socialism  to  Distribution. — Distribu- 
tive justice  also  makes  a  strong  plea  for  the  programme  of 
socialism.  It  cannot  be  claimed  for  one  moment  that 
every  man's  income  is  now  proportioned  to  his  social  ser- 
vice. Income  in  proportion  to  merit  appeals  to  our  sense 
of  right  and  fitness  ;  but  cannot  we  approach  more  nearly 
to  that  than  at  present  by  social  reform,  without  going  to 
the  length  of  social  reorganization?  No  doubt  the  idle 
man  is  morally  a  thief.  He  receives,  but  gives  in  return 
no  personal  effort.  Any  man  who  has  not  earned  the 
right  of  repose  by  his  own  past  services,  with  fruitful 
mental  or  physical  toil,  is  a  shameless  cumberer  of  the 
earth,  unless,  indeed,  he  is  incapacitated  for  useful  em- 
ployment. Would  the  world  suffer  by  your  death  ?  That 
is  the  test.  If  you  merely  clip  coupons,  no  one  would 
miss  you. 

Social  Obligations  of  Wealth.  —  We  may  take  hope  from 
the  fact  that  men  everywhere  are  coming  to  recognize  the 


SOCIALISM  319 

social  obligations  of  the  individual.  Dr.  James  Fraser, 
late  Bishop  of  Manchester,  England,  expressed  the  idea  in 
words  the  essential  thought  of  which  is  as  follows:  "  Most 
of  us  are  compelled  by  our  necessities  to  render  service  to 
our  fellows.  Some  of  us,  however,  have  inherited  or  re- 
ceived money  in  some  way  without  a  return  on  our  part. 
We  are  placed  by  God  on  our  honor.  It  becomes  a  matter, 
not  of  physical  compulsion,  but  of  honor  with  us  to  serve 
our  fellows."  What  is  here  said  would  apply  also  to  those 
who  become  wealthy  through  the  accidental  discovery  of 
valuable  treasures,  such  as  oil,  natural  gas,  or  gold  on  or 
under  the  soil  which  they  own,  or  through  the  growth  of 
cities,  which  adds  immensely  to  the  value  of  favored  land. 
Were  you  to  receive  an  accession  of  wealth  in  such  a  way, 
the  wealth  would  be  yours  in  the  eyes  of  the  law,  but 
morally  it  would  be  simply  a  new  opportunity  to  help  for- 
ward the  progress  of  humanity.  It  is  the  growing  realiza- 
tion of  this  idea  that  is  leading  American  men  of  wealth 
to  endow  so  generously  universities  and  other  institutions 
for  the  public  welfare.  This  idea  is  contained  in  the  now 
famous  epigram  of  one  of  our  wealthiest  manufacturers, 
"To  die  rich  is  to  die  disgraced." 

3.  and  4.  The  Relation  of  Socialism  to  Exchange  and 
Consumption.  —  We  cannot  take  the  space  necessary  to 
point  out  all  the  economic  changes  that  would  appear  in 
a  socialistic  state.  It  must  suffice  merely  to  note  that 
exchange  and  consumption,  as  well  as  production  and 
exchange,  would  be  revolutionized.  A  credit  economy 
might  entirely  supersede  our  present  mixed  money  and 
credit  economy,  and  socialism,  to  be  consistent,  would 
have  to  make  exchange  values  accurately  proportionate 
to  costs  in  human  labor  and  other  sacrifice.  Moreover, 


320        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

equitable  distribution  of  a  largely  increased  product,  if  it 
could  be  achieved,  would  of  course  be  reflected  in  the 
amount  and  character  of  goods  consumed.  Particularly, 
it  may  be  supposed  that  inclusive,  as  contrasted  with 
exclusive,  enjoyment  of  wealth  would  fill  a  much  larger 
place  in  the  life  of  a  people  socialistically  organized. 

The  Weaknesses  of  Socialism. — In  considering  social- 
ism as  a  scheme  for  social  reconstruction,  a  number  of 
difficulties  suggest  themselves.  Prominent  among  these  is 
(1)  the  probable  numbing  effect  of  the  system  upon  indi- 
vidual initiative  and  energy.  What  motive  to  activity  can 
take  the  place  of  the  desire  for  individual  and  family  ad- 
vancement through  the  accumulation  of  private  property? 
Another  very  grave  difficulty  lies  in  (2)  the  introduction 
of  the  requisite  unity  in  the  organization  and  management 
of  industry.  In  some  industries  where  the  work  is  of  a 
routine  nature,  the  problem  of  organization  may  not  be 
impossible  of  solution.  But  what  shall  we  say  of  such 
industries  as  agriculture,  which  has  hitherto  resisted  all 
efforts  at  centralization?  In  the  third  place,  (3)  the 
socialist  state  would  have  the  herculean  task  of  appor- 
tioning work  of  all  conceivable  degrees  of  difficulty  and 
disagreeableness  among  the  workers.  How  could  this  be 
accomplished  without  engendering  a  universal  discontent 
that  would  be  fatal  to  the  plan  at  its  very  inception  ? 

Again  (4)  the  danger  to  personal  freedom  under  the  pro- 
posed system  seems  a  very  real  one.  Up  to  a  certain  point, 
it  is  true,  government  seems  to  improve  as  its  functions 
increase  in  number  and  importance.  But  would  this  hold 
true  indefinitely?  We  may  even  grant,  for  argument's 
sake,  that  as  our  very  livelihood  would  depend  on  the 
efficiency  of  government,  all  the  force  and  energy  that  are 


SOCIALISM  321 

now  expended  in  private  service  would  be  diverted  into 
public  channels.  But  what  would  happen  if,  in  spite  of 
all  precautions,  some  unscrupulous  combination  should  se- 
cure control  of  government  ?  Would  there  remain,  inside 
or  outside  of  the  government,  standing  ground  for  effec- 
tive, yet  peaceful,  opposition  ?  It  is  to  be  feared  that  there 
would  not.  Dissatisfaction  would  exist,  for  human  nature 
is  such  that  man  cannot  be  thoroughly  satisfied  with  his 
surroundings.  The  danger  is  that  without  proper  means 
for  its  expression,  this  dissatisfaction  would  grow  and 
spread  beneath  the  surface  of  society  until,  having  no 
other  vent,  it  would  at  last  break  out  in  revolution. 

Finally,  we  may  lay  it  down  as  a  general  rule  that  (5)  the 
domination  of  a  single  industrial  principle  is  dangerous  to 
civilization.  Many  writers  have  pointed  out  that  it  was 
the  domination  of  a  single  social  principle  that  led  to  the 
downfall  of  older  civilizations;  and  a  distinguished  Amer- 
ican —  the  Hon.  Andrew  D.  White,  in  an  excellent  address 
entitled  "The  Message  of  the  Nineteenth  Century  to 
the  Twentieth  "  —  has  expressed  the  fear  that  the  private 
business  principle,  with  the  "  mercantilism  "  that  naturally 
attends  it,  seriously  threatens  American  civilization. 
What  is  needed  is  a  coordination  of  the  two  principles,  — 
the  principle  of  private  and  of  public  business.  It  is  de- 
sirable that  some  should  serve  the  public  in  an  official 
capacity  —  some  men  are  specially  adapted  to  that  work; 
but  it  is  equally  desirable  that  an  ample  field  should  be 
left  for  those  who  prefer  private  initiative  and  activity. 
Our  present  system,  much  as  it  may  need  reform,  offers 
opportunity  for  the  coordination  of  the  two  principles  ; 
socialism  would  not  do  so. 

But  it  is  as  difficult  to  predict  the  ways  in  which  social- 


322       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

ism  would  fail  as  it  is  for  the  socialist  to  say  definitely  just 
how  it  would  work,  and  this  suggests  their  real  weakness : 
they  venture  to  predict  the  course  of  economic  evolution 
too  far  in  advance.  Certainly  we  must  have  ideals  and 
look  to  the  future,  but  we  are  unable  to  say  very  far  in 
advance  what  will  be  the  best  means  for  attaining  them. 
The  hope  that  a  juster  distribution  of  wealth  will  prevail 
and  that  income  will  more  and  more  represent  social  ser- 
vice, is  cherished  by  many  who  do  not  call  themselves 
socialists,  and  who  believe  it  wise  to  concentrate  their 
efforts  on  practicable  social  reform. 

Our  Debt  to  Socialists.  —  Socialists  have  rendered  society 
a  real  service  by  calling  attention  to  pressing  social  prob- 
lems ;  by  forcing  us  to  reflect  upon  the  condition  of  the 
less  fortunate  classes ;  by  quickening  our  consciences ;  by 
helping  us  to  form  the  habit,  not  yet  generally  acquired, 
of  looking  at  all  questions  from  the  standpoint  of  public 
welfare  and  not  merely  from  that  of  individual  gain ;  and 
finally,  by  calling  our  attention  to  the  industrial  functions 
of  government,  thus  leading  us  and  aiding  us  to  separate 
rationally  the  sphere  of  private  industry  from  that  of 
public  business. 

Socialism  not  Anarchism. — Socialism  has  been  described 
as  industrial  democracy  established  and  controlled  by  gov- 
ernment. It  is  evident,  therefore,  that  the  socialist  would 
give  to  government  the  greatest  possible  power.  At  the 
opposite  extreme  stands  a  proposed  system  which  is 
strangely  enough  often  confused  by  the  ignorant  with 
socialism.  Anarchism  would  do  away  with  government 
entirely,  leaving  all  activity  to  individuals  acting  volunta- 
rily:  socialism,  as  we  have  seen,  would  lessen  the  sphere 
of  individual  initiative,  leaving  the  greater  part  of  industrial 


SOCIALISM  323 

activity  in  the  hands  of  government.  In  the  main,  there- 
fore, anarchism  and  socialism  are  antithetical.  Yet  there 
are  some  anarchists  who  believe  that  were  government 
abolished,  individuals  would  freely  and  of  their  own 
accord  form  cooperative  groups  which,  federated,  would 
manage  all  production.  Anarchy  is,  in  the  minds  of  most 
thinking  people,  repulsive  and  inconceivable.  Events  of 
recent  years  have  given  a  certain  morbid  interest  to  the 
cult  which  it  is  not  well  to  encourage. 

Communism  and  Socialism.  —  Communism  is  a  term  not 
much  used  in  recent  writings.  In  the  past  it  was  em- 
ployed to  designate  an  extreme  kind  of  socialism.  Com- 
munism called  for  equality  of  possessions  and  income, 
without  much  regard  to  the  matter  of  the  regulation  of 
production.  Some  writers  have  used  the  word  "com- 
munism "  to  designate  violent  schemes  of  radical  social 
reform  in  distinction  from  more  peaceful  and  conservative 
plans  of  reconstruction,  which  they  designate  by  the  name 
socialism.  Yet  all  the  communistic  societies  in  the  United 
States  are  composed  of  peace  men,  who  do  not  believe  in 
war,  and  even  preach  non-resistance  to  aggression.  It  is 
as  well,  perhaps,  to  abandon  the  attempt  to  make  a  dis- 
tinction between  communism  and  socialism,  by  simply 
dropping  the  word  "  communism." 

Other  Names  for  Socialism.  —  Collectivism  is  a  name 
which  many  socialists  of  recent  years  have  favored  to 
designate  their  programme.  They  have  sometimes  chosen 
the  name  in  order  to  escape  the  odium  which  the  igno- 
rance of  past  years  has  laid  upon  the  older  word.  Other 
names  used  to  describe  socialists  in  one  or  another  of  their 
groups  are  :  Fabian  Socialists,  the  name  applied  to  a 
group  of  English  socialists  and  their  followers  who  have 


324       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

as  their  rule  of  action  "Make  haste  slowly";  Christian 
Socialists,  the  name  applied  to  those  who  base  their  argu- 
ment and  their  hope  upon  the  Christian  gospel ;  Scientific 
Socialists,  the  name  applied  to  the  followers  of  Karl  Marx, 
who  in  his  great  work,  Capital,  aimed  to  show  that  social- 
ism is  destined  to  come  in  its  time,  whether  we  will  or  no, 
through  the  evolution  of  great  underlying  forces  in  indus- 
trial society. 

Perhaps  the  greater  part  of  political  socialists  in  Europe 
and  America  —  socialists  who  have  a  political  programme 
and  regularly  support  their  socialist  candidates  for  office 
—  are  Marxists.  But  the  name  under  which  the  political 
movement  has  made  the  greatest  progress  in  Europe,  and 
especially  in  Germany  and  Belgium,  is  Social  Democracy, 
the  partisans  being  known  as  Social  Democrats. 

Present  Status  of  the  Socialist  Political  Movement.  — 
Socialism  as  a  practical  political  movement  has  been  mak- 
ing surprisingly  rapid  strides  in  Europe  within  the  last 
decade.  It  is  impossible  to  make  an  accurate  estimate  of 
the  aggregate  number  of  political  socialists  at  the  present 
time,  but  certain  figures  are  available  which  indicate  in  a 
general  way  the  rapid  growth  and  present  status  of  the 
party.  Thus  in  the  German  Empire  the  number  of  votes 
cast  for  socialist  candidates  tor  the  Reichstag  rose  in  the 
sixteen  years,  188T  to  1903,  from  763,128  to  3,011,114, 
which  represents  a  change  from  10.1  per  cent  to  31.7  per 
cent  of  the  entire  vote  of  the  Empire.  The  party  has  81 
representatives  in  the  present  Reichstag.  In  the  Reichs- 
rath  of  Austria-Hungary,  10  seats  are  held  by  socialists. 
The  Danish  socialists  in  1903  polled  55,479  votes,  and 
elected  16  members  to  the  National  Parliament.  In 
Italy  the  number  of  socialist  deputies  in  Parliament  rose 


SOCIALISM  325 

between  1893  and  1900  from  5  to  33.  In  Belgium, 
where  the  movement  has  in  some  respects  had  its 
greatest  success,  the  total  vote  rose  from  335,000  in 
1894  to  476,862  in  1902,  the  number  of  representa- 
tives in  the  National  Parliament  at  the  same  time 
increasing  from  32  to  34.  The  strength  of  the  movement 
in  France  cannot  be  shown  so  easily  on  account  of  the 
numerous  factions  into  which  the  party  is  split  up  ;  but 
the  fact  that  M.  Millerand,  a  socialist,  found  a  place  in 
the  Cabinet  formed  in  1901,  is  perhaps  more  significant 
than  many  figures.  In  England,  where  large  parties  have 
always  been  few  in  number,  socialism  has  shown  a  strong 
tendency  to  avoid  the  ordinary  political  channels.  The 
same  is  true  of  the  United  States,  though  in  recent  state 
elections,  and  even  more  in  municipal  elections,  surprising 
gains  have  been  made  by  politically  organized  socialists. 
In  1902  the  total  socialist  vote  in  state  and  Congressional 
elections  was  283,525. 

SUMMARY 

1.  Socialism  is  coercive  cooperation  in  production. 

2.  Socialists  would  permit  private  property  in  income,  but  not  in 

means  of  production. 

3.  Socialists  claim  that  labor  produces  all  wealth,  and  they  aim  at  a 

distribution  based  on  justice. 

4.  Socialism  is  but  an  extension  of  existing  institutions. 

5.  The  strength  of  socialism  lies  in  its  proposed  saving  of  waste,  in 

its  proposal  for  juster  distribution,  and  its  demand  for  the  recog- 
nition of  the  social  obligations  of  wealth. 

6.  Its  weakness  lies  in  its  requirement  of  impossible  human  virtues. 

7.  Anarchism  is  really  the  opposite  of  socialism. 

8.  There  are  many  differences  of  view  among  socialists,  these  differ- 

ences giving  rise  to  distinct  names  for  the  different  groups. 

9.  The  political  socialists  have  increased  rapidly  in  number  in  Europa 

during  the  past  fifteen  years. 


326       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

QUESTIONS 

1.  Define    socialism:    anarchism.      What    is    Christian  socialism? 

Evolutionary  socialism?  Fabian  socialism?  Name  prominent 
poets  and  novelists  who  belong  to  one  or  another  of  these 
schools. 

2.  How  far  does  socialism  do  away  with  private  property  ? 

3.  What  effect  would  socialism,  if  successful,  have  on  production? 

On  distribution?     On  exchange?     On  consumption? 

4.  What  difficulties  stand  in  the  way  of  the  realization  of  socialism? 

5.  Why  is  it  not  right  to  say  of  every  public  interference  in  industry 

that  it  is  socialistic?   When  may  a  measure  be  called  socialistic? 

6.  What  is  the  origin  of  wealth  according  to  socialists  ?    Discuss  this 

claim. 

7.  Why  is  anarchism  not  feasible  ? 

LITERATURE 

Bellamy,  E.  :  Looking  Backward  (a  novel). 

Brooks,  J.  G. :  The  Social  Unrest,  Ch.  VIII. 

Ely,  R.  T. :  Socialism  and  Social  Reform,  and  French  and  German 
Socialism. 

Gronlund,  L.:  The  Cooperative  Commonwealth. 

Howells,  W.  D. :   A  Traveller  from  Altruria  (a  novel). 

Kirkup,  E. :  Inquiry  into  Socialism. 

Mill,  J.  S. :  Principles  of  Political  Economy,  Bk.  II,  Ch.  I,  §§  2,  3,  and  4. 

Morley,  H.  (Editor)  :  Ideal  Commonwealths. 

New  International  Encyclopedia:  articles  on  " Socialism  "  and  "Social- 
ist Parties." 

Rae,  J. :  Contemporary  Socialism. 

Vandervelde  :  Collectivism  and  Industrial  Evolution. 

Ward,  Mrs.  H. :  Marcella  (a  novel). 


BOOK  IY 
PUBLIC  FINANCE 

CHAPTER  I 
EXPENDITURE  AND  REVENUE 

I.   INTRODUCTORY  REMARKS  ON  THE  NATURE  OF 
PUBLIC  FINANCE 

Definition  of  Public  Finance.  —  Public  finance  is  the 
science,  or  the  branch  of  economics,  which  deals  with  the  reve- 
nues and  expenditures  of  government,  and  with  the  adminis- 
tration of  such  revenues  and  expenditures.  The  name  must 
be  carefully  distinguished  from  private  finance,  which  deals 
with  the  revenues  and  expenditures  of  an  individual  or  a 
private  business,  and  from  corporation  finance,  which  deals 
with  the  revenues  and  expenditures  of  private  corpora- 
tions. The  student  is  also  cautioned  against  referring 
the  word,  as  is  often  mistakenly  done,  to  the  subjects  of 
money  and  banking,  which  belong  to  another  part  of 
economics. 

Early  treatises  in  English  economics  usually  had  no 
special  part  devoted  to  public  finance,  but  included  some 
observations  on  taxation  in  the  treatment  of  other  general 
topics.  It  is  true  that  the  difficulty  of  saying  anything 
satisfactory  about  a  subject  so  vast,  within  the  scope  of  a 
few  pages,  is  a  serious  one ;  yet  it  does  not  seem  scientifi- 

327 


328        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

cally  satisfactory  to  pass  over  one  of  the  most  important 
economic  topics,  even  in  an  elementary  treatise.  We  shall 
therefore  attempt  to  give  some  impression  as  to  the  nature 
and  scope  of  public  finance,  while  reminding  the  student 
that  later  and  more  careful  study  of  the  subject  should 
be  carried  on  with  the  help  of  some  regular  text-book 
entirely  devoted  to  it. 

The  Magnitude  and  Influence  of  Public  Business.  —  Gov- 
ernment business  is  the  largest  single  business  in  every 
great  nation.  In  the  United  States  to-day,  a  few  men 
have  fortunes  of  upwards  of  $100,000,000,  and  we  rightly 
regard  these  fortunes  as  colossal;  yet  the  annual  revenues 
of  the  various  governments  in  the  United  States  —  Fed- 
eral, state,  and  local  —  are  about  four  times  the  probable 
upper  limit  of  such  fortunes,  being  about  twelve  hundred 
millions. 

So  vast  and  so  permeating  is  government  business  that 
it  affects  vitally  all  other  businesses.  If  our  government 
should  have  a  large  surplus  every  year,  and  should  keep  it 
out  of  circulation,  we  should  shortly  have  a  stringency  in 
the  money  market  that  would  result  in  a  terrible  panic. 
This  is  one  of  the  reasons  why  a  surplus  Federal  revenue 
presents  so  difficult  a  problem.  The  United  States  alone 
among  nations  locks  up  any  considerable  part  of  the  pub- 
lic revenue.  Under  our  independent  treasury  or  "sub- 
treasury"  system,  a  large  part  of  the  Federal  revenues 
flowing  into  our  subtreasuries  can  regularly  get  out  only 
in  payment  of  claims  against  the  United  States,  whereas 
other  governments  bank  all  or  nearly  all  their  revenues  in 
regular  banking  institutions,  and  hence  do  not  take  the 
money  out  of  circulation. 

Still  another  feature  of   government  business  has  an 


EXPENDITURE  AND  REVENUE  329 

important  bearing  on  all  private  business.  Government 
to-day  is  the  largest  single  employer  of  labor,  and  hence 
profoundly  influences  the  conditions  of  employment  else- 
where. It  is  largely  for  this  reason  that  labor  organiza- 
tions have  worked  to  secure  the  passage  of  many  laws 
regulating  the  hours  and  other  conditions  of  employment 
in  government  work. 

Different  Views  of  the  Economic  Functions  of  Govern- 
ment. —  It  is  clear  that  the  dominant  idea  of  the  true 
function  of  government  will  determine  the  character  and 
extent  of  government  business.  In  an  anarchist  society 
—  if  there  could  be  society  in  anarch}1- —  there  would  be 
no  public  finance.  In  a  State  limited  to  the  functions 
allotted  to  it  by  the  extreme  individualist,  public  finance 
would  be  relatively  insignificant.  In  a  socialist  State, 
public  finance  would  so  overshadow  private  business  and 
private  finance  that  economics  and  public  finance  would 
almost  become  names  for  the  same  thing.  The  character 
and  scope  of  government  business  in  the  modern  State 
will  appear  in  the  following  pages. 

II.   PUBLIC  EXPENDITURE 

The  Magnitude  of  Public  Expenditure.  —  The  impor- 
tance of  public  finance  becomes  more  apparent  when  we 
consider  the  magnitude  of  government  expenditures  in 
modern  times.  The  fact  has  often  been  cited  that  Eng- 
land's expenditure  increased  forty-fold  between  1685  and 
1841,  while  her  population  was  increasing  only  threefold  ; 
but  this  is  only  one  of  hundreds  of  equally  significant  facts. 
The  French  budget  —  the  name  applied  to  the  detailed 
statement  of  revenues  and  expenditures  —  showed  expendi- 
tures of  a  thousand  million  francs,  or  about  $200,000,000 


330       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 


in  1821  for  the  first  time,  and  the  result  was  widespread 
alarm ;  yet  no  French  budget  since  that  time  has  called 
for  smaller  expenditure,  and  to-day  the  total  annual 
expenditure  of  France  and  her  minor  governmental 
divisions  amounts  to  about  $1,000,000,000.  The  annual 
national  expenditure  of  Great  Britain,  after  a  slight  de- 
crease following  the  Napoleonic  wars,  has  increased  quite 
regularly  since,  rising  from  about  8235,000,000  in  1833  to 
a  little  over  $500,000,000  in  1898,  just  before  th3  outbreak 
of  the  South  African  War. 

Growth  of  Expenditure  in  the  United  States.  —  The  fol- 
lowing table  shows  a  similar  increase  in  the  Federal 
expenditures  of  the  United  States  :  — 

EXPENDITURES  OF  THE  UNITED  STATES 


Y«AR 

ORDINARY  EXPENDI- 
TURES 

INTEREST 

TOTAL 

PER  CAPITA 

1792 

15,896,000 

$2,373,000 

$  8,269,000 

$2.04 

1800 

7,411,000 

3,402,000 

10,813,000 

1.17 

1820 

13,134,000 

5,151,000 

18,285,000 

1.90 

1840 

24,139,000 

174,000 

24,313,000 

1.42 

1860 

60,056,000 

3,144,000 

63,200,000 

2.01 

1870 

164,421,000 

129,235,000 

293,656,000 

6.80 

1880 

169,090,000 

95,757,000 

264,847,000 

5.28 

1890 

261,637,000 

36,099,000 

297,736,000 

4.75 

1900 

447,553,000 

40,160,000 

487,713,000 

6.39 

1902 

442,082,000 

29,108,000 

471,190,000 

5.96 

1903 

477,542,000 

28,556,000 

506,099,000 

6.26 

Causes  of  Growth.  —  It  must  not  be  thought  that  this 
great  increase  in  public  expenditures  is  due  to  reckless- 
ness or  dishonesty.  Probably,  on  the  whole,  government 
has  improved  during  the  last  century ;  and  it  is  significant 


EXPENDITURE  AND  REVENUE  331 

that  where  government  is  most  undoubtedly  honest,  there 
have  been  larger  increases  than  in  many  other  quarters. 
The  explanation  of  the  increase  is  not  difficult.  In  the 
first  place,  we  must  remember  that  population  has  been 
increasing  more  rapidly  than  ever  before,  and  that  increase 
in  aggregate  expenditure  does  not  mean  a  proportionate 
increase  in  the  burden  borne  by  individuals.  But  beyond 
this,  we  must  conclude  that  government  activity,  while 
wiser  than  before,  is  also  m'ore  extensive  and  important. 
Public  schools,  provision  for  public  health,  public  parks, 
public  baths,  public  libraries,  all  show  the  greatly  increased 
range  of  State  activity  in  modern  times.  With  some  un- 
fortunate exceptions,  these  increased  expenditures  are  a 
sign  of  health,  and  do  not  indicate  any  tendency  on  the 
part  of  government  to  absorb  an  undue  proportion  of  the 
industrial  life  of  the  nation. 

This  can  hardly  be  said,  however,  of  the  great  increase 
in  expenditure  for  pensions  and  for  military  and  naval 
equipment.  Whether  these  expenditures  have  been  wisely 
or  unwisely  made,  it  is  at  least  regrettable  that  70  per 
cent  of  the  regular  Federal  expenditures  are  due  to  past 
wars  and  to  the  preparation  for  war.  The  burden  of  this 
expenditure  alone  amounted  in  1903  to  $339,663,200,  or 
$4.20  per  capita. 

Classification  of  Public  Expenditures.  —  So  numerous  are 
the  objects  of  governmental  expenditure  that  it  is  mani- 
festly impossible  to  treat  the  subject  exhaustively  within 
the  limits  of  our  space.  We  must  content  ourselves  here 
with  a  consideration  of  some  of  the  more  important  classes 
into  which  such  expenditures  naturally  fall. 

1.  Expenditures  for  Fulfilling  the  Protective  Functions  of 
the  State.  —  Of  the  general  class  of  expenditures  incurred 


832       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

in  fulfilling  the  protective  function  of  the  State,  the  first 
to  be  mentioned  are  those  (a)  for  security  from  foes  with- 
out the  State.  Under  this  head  falls  the  cost  of  the  army 
and  navy.  Until  within  a  few  years,  this  item  in  our  na- 
tional budget  has  been  relatively  unimportant ;  but  when 
we  look  to  European  countries  we  find  a  very  different 
state  of  things.  Italy  and  Spain  feel  the  burden  more 
than  the  others,  but  the  statesmen  of  Russia,  France,  Ger- 
many, and  England  are  seriously  concerned  over  the  prob- 
lem which  confronts  them  in  providing  for  the  national 
defence.  The  direct  cost  of  national  defence  includes  the 
pay  and  equipment  of  troops,  and  the  cost  of  ships,  and 
cannon,  and  ammunition,  etc.  The  indirect  cost  is  repre- 
sented by  the  pension  list,  as  well  as  by  the  great  waste  of 
resources  and  opportunities  for  labor  in  times  of  war. 

(6)  Internal  Security.  Under  expenditures  for  internal 
security  are  included  the  cost  of  our  police  system  in  all 
its  branches,  —  including  constables,  sheriffs,  etc.,  —  and 
that  of  our  judiciary  system,  since  both  of  these  are  occu- 
pied almost  wholly  in  securing  persons  and  property  from 
injury. 

(<?)  Expenditures  for  the  Poor  and  Unfortunate.  Every 
civilized  government  recognizes  an  obligation  to  extend 
relief  to  paupers,  to  the  deaf,  the  blind,  the  insane,  and 
the  feeble-minded,  who,  from  natural  defects,  are  unable 
to  hold  their  own  in  the  struggle  for  existence.  The  prob- 
lem of  relieving  such  classes  is  receiving  an  increasing 
share  of  attention  from  thoughtful  people  everywhere. 

2.  Expenditures  for  Fulfilling  the  Commercial  Functions. 
—  A  second  general  class  of  expenditures  consists  of  those 
which  are  incurred  in  fulfilling  the  commercial  functions 
of  the  State.  Among  these  are  expenditures  (a)  for  the 


EXPENDITURE  AND  REVENUE  333 

construction  and  maintenance  of  such  agencies  as  roads, 
bridges,  canals,  and  riverways,  improved  harbors,  light- 
houses, etc.  (5)  The  post-office  and  telegraph  and  railway 
lines  are  also  commercial  as  well  as  educational  in  their 
purpose,  but  they  are  generally  managed  as  self-sustaining 
or  remunerative  investments,  even  when  they  are  under 
the  ownership  and  management  of  the  State.  A  similar 
expenditure  for  commerce  is  that  (<?)  for  maintaining  a 
currency  and  systems  of  weights  and  measures.  (cT)  Ex- 
penditure for  the  consular  service  also  falls  under  the 
same  general  head.  To  a  less  degree  the  same  may  be 
said  of  the  diplomatic  service,  though  in  this  case  the  pur- 
pose of  the  service  is  perhaps  primarily  for  maintaining 
international  peace. 

3.  Expenditures  for  Fulfilling  the  Developmental  Func- 
tion. —  The  third  general  class  of  expenditures  consists  of 
those  incurred  in  fulfilling  the  developmental  function  of 
the  State.  Most  important  among  these  is  (a)  the  expendi- 
ture for  education.  Of  all  classes  of  expenditure  that  for 
education  has  grown  most  constantly  and  rapidly  in  the 
modern  State.  Especially  has  such  expenditure  increased 
with  the  spread  of  democracy  in  government.  It  is  felt 
everywhere  that  republican  institutions  find  their  best 
safeguard  in  a  high  average  of  enlightenment.  Moreover, 
there  is  reason  for  believing  that  even  more  directly  ex- 
penditure for  education  is  justified  as  a  productive  invest- 
ment by  the  increased  earning  power  and  the  improved 
consuming  power  of  the  people,  to  which  it  powerfully 
contributes.  Under  the  head  of  education  fall  not  only 
the  education  of  the  schools,  but  also  that  which  is  to  be 
gained  from  art  galleries  and  museums  and  other  agencies 
for  the  promotion  of  culture.  It  is  a  mistake  to  regard 


334       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

these  merely  as  amusements  for  the  idle  hour.  They 
should  be,  and  for  many  they  are,  indispensable  adjuncts 
to  books  and  to  the  schools  in  securing  a  higher  education. 

Other  expenditures  falling  in  the  same  general  class 
are  those  for  (b)  public  recreation,  for  (c)  investigation,  and 
(<f)  for  maintaining  equitable  conditions  for  private  business. 

4.  Expenditures  for  the  Maintenance  of  Government.  — 
The  expenditures  we  have  been  considering  are,  of  course, 
expenditures  by  government :  we  have  now  to  mention  a 
fourth  general  class,  —  the  expenditures  for  government ; 
that  is,  expenditures  for  governmental  functions  too  gen- 
eral and  fundamental  to  be  ranged  under  any  of  the  heads 
that  we  have  before  mentioned.  Such  are  the  expenditures 
for  (a~)  legislation  and  administration,  and  for  (6)  tax  col- 
lection. 

Objects  of  Public  Expenditure  in  the  United  States.  —  It 
is  not  customary  for  governments  to  classify  their  expen- 
ditures as  we  have  here  classified  them,  or  in  any  such  way 
as  will  show  accurately  just  what  the  government  pays  for 
the  objects  which  we  have  discussed.  But  a  careful  study 
of  Federal,  state,  and  local  expenditures  will  show  that 
the  greater  part  of  the  Federal  expenditure  is  for  the  pro- 
tective and  commercial  functions,  while  the  greater  part 
of  the  expense  of  the  developmental  functions  rests  upon 
the  state  and  local  governments.  Considering  the  aggre- 
gate expenditures  of  all  the  divisions  of  government,  we 
find  that  they  are  roughly  divided  as  follows:  for  the 
protective  functions,  about  45  per  cent ;  for  the  develop- 
mental functions,  about  30  per  cent ;  for  the  commercial 
functions,  about  15  per  cent;  and  for  the  expenses  of 
government  itself,  about  10  per  cent. 

It  is  also  interesting  to  note  the   relative  growth  of 


EXPENDITURE  AND  REVENUE  335 

expenditure  in  the  different  political  divisions  of  the  gov- 
ernment. Not  only  in  the  United  States,  but  also  quite 
generally  throughout  the  civilized  world  an  increasing 
proportion  of  the  aggregate  expenditure  is  being  made  by 
the  local  governments,  from  which  it  appears  that  the 
greatest  increase  in  governmental  activity  occurs  where 
government  is  most  directly  and  closely  watched  and 
administered  by  the  people  themselves.  In  the  United 
States  the  expenditures  of  the  state  governments  have,  as 
a  rule,  diminished  in  importance  relatively  both  to  Federal 
and  local  expenditures,  and  this  fact  has  generally  been 
held  to  indicate  growing  nationalization  as  well  as  grow- 
ing governmental  activity. 

III.  PUBLIC  REVENUE 

Classification.  —  Differing  classifications  of  public  rev- 
enue have  been  almost  as  numerous  as  the  writers  who 
have  made  them.  Without  entering  into  a  discussion  of 
the  reasons  for  such  differences,  we  may  present  at  once  a 
classification  which  is  in  general  harmony  with  the  usual 
treatment  of  the  subject. 

A.  Permanent  Revenues. 
I.   Regular  revenues. 

1.  Derived  directly  from  government  ownership, 
a.  Revenues  from  public  domains. 

6.   Revenues  from  public  industries. 

a'.  Industries  publicly  owned  and  managed. 
V.  Industries  publicly  owned,  but  managed  by  lessees 
under  a  charter. 

2.  Derived  from  the  incomes  of  private  persons  and  corporations, 
a.   Fees. 

J.  Special  assessments. 
c.   Taxes. 
H.  Irregular  and  miscellaneous.   Fines,  forfeits,  escheats,  gifts,  etc. 


336       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

B.  Temporary  Revenues.     (To  be  repaid.) 
L   Public  loans  by  the  sale  of  bonds. 
II.   Public  loans  by  the  issue  of  treasury  notes. 

Miscellaneous  Revenues.  —  The  class  of  miscellaneous 
revenues  includes  gifts,  fines,  forfeits,  escheats,  "con- 
science money,"  etc.  Escheat  is  a  legal  term  used  to 
describe  a  property  that  falls  to  the  State  in  default  of 
other  heirs.  Conscience  money  is  money  sent  without 
name  by  persons  who  have  defrauded  the  government. 

Gifts  amount  to  more  than  is  commonly  supposed,  al- 
though they  form  a  relatively  unimportant  source  of  rev- 
enue. Formerly  gifts  were  not  infrequently  made  for  the 
general  expenditures  of  government.  Less  than  a  quarter 
of  a  century  ago,  a  citizen  of  New  Jersey  left  the  United 
States  nearly  a  million  dollars  to  be  applied  to  the  pay- 
ment of  the  national  debt.  But  gifts  are  now  more  com- 
monly made  for  special  purposes,  as  when  Mr.  Smithson 
left  the  United  States  half  a  million  dollars  io  be  used  in 
the  foundation  of  the  Smithsonian  Institution  for  the 
Advancement  of  Science. 

Public  Domains.  —  Public  domains  are  a  source  of  con- 
siderable revenue  in  Germany  and  some  other  countries. 
It  has  generally  been  thought  best  that  governments 
should  not  keep  any  agricultural  land,  and  to-day  not  a 
great  deal  of  arable  land  is  retained  by  governments, 
though  there  is  not  now  so  strong  a  tendency  to  part 
with  it  as  there  was  a  generation  ago.  The  public 
ownership  of  forests,  on  the  other  hand,  is  everywhere 
increasing. 

Public  Industries.  —  Industries,  except  those  of  a  mo- 
nopolistic nature,  have  not,  as  a  rule,  succeeded  well  as 
government  undertakings.  Model  industrial  establish. 


EXPENDITURE  AND  REVENUE  337 

ments  may,  however,  be  managed  by  government  with 
beneficial  results.  Some  very  important  industries,  such 
as  the  manufacture  of  fine  china,  have  had  their  origin  in 
government  establishments.  Natural  monopolies  may  be 
made  to  yield  a  large  part  of  ordinary  revenue,  especially 
in  large  cities,  but  manufacturing  industries  that  are  natu- 
rally competitive  should  be  left  in  private  hands. 

Public  Loans.  —  Public  loans  are  a  source  of  revenue 
that  gives  rise  to  public  debts.  Great  national  debts  are 
comparatively  new  in  the  world's  history.  Indeed,  their 
origin  is  as  recent  as  the  reign  of  William  and  Mary  in 
England.  How  important  they  have  become  in  recent 
times  may  be  judged  from  the  following  passage  in  Pro- 
fessor H.  C.  Adams's  work  on  Public  Debts:  "The  civil- 
ized governments  of  the  present  day  are  resting  under 
a  burden  of  indebtedness  computed  at  $27,000,000,000. 
This  sum,  which  does  not  include  local  obligations  of  any 
sort,  constitutes  a  mortgage  of  $722  upon  every  square 
mile  of  territory  over  which  the  burdened  governments 
extend  their  jurisdiction,  and  shows  a  per  capita  indebted- 
ness of  $28  upon  their  subjects.  ...  At  the  liberal  esti- 
mate of  $1.50  per  day,  the  payment  of  accruing  interest 
at  5  per  cent  would  demand  the  continuous  labor  of  three 
millions  of  men."  On  the  whole  public  debts  have  in- 
creased largely  in  the  fifteen  years  that  have  elapsed 
since  the  publication  of  Professor  Adams's  book. 

Fees  and  Special  Assessments.  —  Fees  and  special  assess- 
ments closely  resemble  taxes,  but  they  are  of  much  less 
significance  in  the  fiscal  system.  A  fee  is  a  "  payment  made 
to  the  State  on  the  occasion  of  some  specific  service  rendered 
by  the  State  to  the  citizen  —  the  service,  however,  being  non- 
commercial in  character."  The  payment  demanded  for 


338       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

recording  a  deed  or  mortgage  is  a  fee;  so,  also,  is  any 
court  charge,  or  a  charge  for  a  teacher's  certificate,  a  mar- 
riage license,  etc.  A  special  assessment,  which  is  even 
more  like  a  regular  tax,  has  been  denned  as  "  a  compulsory 
contribution,  levied  in  proportion  to  the  special  benefits  de- 
rived, to  defray  the  cost  of  a  specific  improvement  to  property, 
undertaken  in  the  public  interest."  Thus  American  cities 
often  provide  for  the  paving  of  particular  streets  by  laying 
part  of  the  cost  upon  the  entire  municipality  in  the  form 
of  a  tax,  and  placing  the  remainder  of  the  burden,  in  the 
form  of  a  special  assessment,  upon  the  owners  of  "  abut- 
ting "  properties  in  proportion  to  the  value  of  such  prop- 
erties. In  this  way  the  entire  city  pays  for  the  benefit 
conferred  upon  the  city,  while  the  people  living  on  the 
street  or  owning  business  property  there  pay  for  the  spe- 
cial benefit  which  the  improvement  has  conferred  upon 
them.  The  custom  of  municipal  improvement  by  special 
assessment  has  been  developed  much  farther  in  the  United 
States  than  in  Europe. 

Taxes.  —  The  most  important  and  most  regular  source 
of  public  revenues  is  taxation.  Taxes  are  one-sided  trans- 
fers of  valuable  things,  exacted  by  public  authority,  chiefly 
from  citizens,  but  also  from  other  persons  within  its  reach, 
according  to  some  general  rule,  in  order  to  meet  public  ex- 
penses and  to  accomplish  other  public  ends.  Taxes  differ 
from  fees  and  special  assessments,  therefore,  chiefly  in 
that  there  is  no  attempt  to  proportion  the  tax  to  the 
benefit  conferred  upon  the  individual.  The  justification 
of  taxation  lies  simply  in  the  necessity  of  maintaining  the 
State.  If  the  people  are  to  have  a  State  they  must  pay 
for  it,  and  no  better  means  than  taxation  has  yet  been 
discovered. 


EXPENDITURE  AND  REVENUE         339 

What  is  a  Just  Tax  ?  —  No  question  regarding  taxation 
has  been  more  earnestly  discussed  than  the  question  of 
what  constitutes  justice  in  taxation.  One  answer  that  is 
commonly  heard  is  that  taxes  should  be  proportioned 
(1)  to  benefits  derived.  But  it  is  utterly  impracticable  to 
attempt  to  say  what  proportion  of  the  general  benefits  of 
government  accrue  to  particular  individuals.  And  even  if 
this  were  practicable,  it  would  probably  be  found  in  many 
cases  that  the  greatest  benefits  are  enjoyed  by  the  weak 
and  the  poor,  who  are  least  able  to  bear  the  tax  burden. 

The  Faculty  Theory.  — A  theory  more  generally  accepted 
by  economists  to-day  is  that  taxation  (2)  should  be  propor- 
tioned to  "faculty"  or  ability  to  pay.  But  even  accepting 
this  rule,  there  remains  the  difficult  question,  How  is  fac- 
ulty to  be  measured  ?  One  answer  has  been  that  we  may 
measure  ability  by  (a)  consumption;  but  it  is  evident  that 
the  consumption  of  the  poor  is  out  of  all  proportion  to 
their  ability  to  bear  the  burdens  of  the  State.  Another 
suggested  basis  of  measurement  (b)  is  property  ;  but  prop- 
erty differs  widely  in  its  productiveness,  and,  moreover, 
many  persons  with  little  property  have  large  incomes  and 
therefore  great  ability  to  bear  taxation. 

Perhaps  the  least  objectionable  measure  of  ability  is 
afforded  (<?)  by  revenue  or  income,  though  even  here  we 
must  note  that  incomes  differ  in  permanence  and  security, 
and  that  equal  incomes  are  called  upon  to  support  very 
unequal  numbers  of  persons.  It  is  not  possible,  probably, 
to  reach  a  single  perfectly  just  basis  of  apportionment  of 
the  tax  burden  ;  but  the  levying  of  taxes  on  income  or 
revenue,  with  variations  to  correct  manifest  cases  of  in- 
equity, probably  approaches  as  near  to  ideal  taxation  as 
is  possible  to-day. 


340        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Granting  this,  another  question  at  once  presents  itself 
for  solution.  Shall  taxes  be  laid  in  direct  proportion  to 
revenue,  or  shall  the  rate  be  increased  as  the  amount  of 
revenue  increases  ?  The  first  method  is  called  (a)  propor- 
tional taxation;  the  second,  (6)  progressive  or  graduated. 
Sometimes  taxes  are  neither  proportional  nor  progressive, 
but  (c)  regressive;  that  is,  the  rate  diminishes  as  the  taxed 
property  or  revenue  becomes  larger.  Such  taxes  every  one 
admits  to  be  unjust,  though  many  such  taxes  are  levied  ; 
but  there  is  no  general  agreement  regarding  the  relative 
justice  of  proportional  and  progressive  taxation.  We 
cannot  enter  into  a  detailed  discussion  of  the  question, 
but  must  leave  the  further  study  of  the  subject  to  the 
student.  While  the  progressive  tax  seems  preferable  as 
an  ideal,  certain  practical  difficulties  make  it  very  doubt- 
ful whether  we  can  hope  for  realization  of  the  ideal  in 
income  taxation  for  a  long  time  to  come. 

Land  Nationalization  and  Land  Municipalization.  —  A 
very  large  number  of  intelligent  citizens  of  England, 
Australia,  and  the  United  States  are  adherents  and 
devoted  advocates  of  a  scheme  for  entirely  abolishing 
taxation,  as  that  word  is  ordinarily  understood.  Mr. 
Henry  George,  author  of  Progress  and  Poverty,  a  man 
of  wonderfully  earnest  human  sympathies,  and  of  very 
strong  and  sincere  convictions,  gave  the  latter  part  of 
his  life  to  the  advocacy  of  the  plan,  which  he  himself 
did  most  to  formulate  and  popularize  in  modern  times. 
We  can  do  no  better,  therefore,  than  to  explain  the  pro- 
posed system  in  Mr.  George's  own  words,  as  printed  in 
his  paper,  the  Standard :  — 

The  Standard  advocates  the  abolition  of  all  taxes  upon 
industry  and  the  products  of  industry,  and  the  taking,  by 


EXPENDITURE  AND  REVENUE  341 

taxation  upon  land  values,  irrespective  of  improvements,  of 
the  annual  rental  value  of  all  those  various  forms  of  natural 
opportunities  embraced  under  the  general  term,  Land. 

We  hold  that  to  tax  labor  or  its  products  is  to  discourage 
industry.  We  hold  that  to  tax  land  values  to  their  full  amount 
will  render  it  impossible  for  any  man  to  exact  from  others  a 
price  for  the  privilege  of  using  those  bounties  of  nature  in 
which  all  living  men  have  an  equal  right  of  use ;  that  it  will 
compel  every  individual  controlling  natural  opportunities  to 
utilize  them  by  employment  of  labor  or  abandon  them  to 
others ;  that  it  will  thus  provide  opportunities  of  work  for  all 
men,  and  secure  to  each  the  full  reward  of  his  labor ;  and  that 
as  a  result  involuntary  poverty  will  be  abolished,  and  the 
greed,  intemperance,  and  vice  that  spring  from  poverty  and 
the  dread  of  poverty  will  be  swept  away. 

The  proposition  is  here  definitely  made  that  the  State 
shall  take  all  of  the  pure  or  economic  rent  of  land,  and 
the  claim  is  made  in  explanation  and  justification  of  the 
policy  that  it  will  abolish  poverty.  Such  a  policy  might, 
indeed,  prevent  landowners  who  do  not  care  to  use  their 
land  from  keeping  it  out  of  the  hands  of  those  who  would 
use  it ;  but  how  it  would  effect  all  the  other  predicted  bless- 
ings is  difficult  for  most  people  to  comprehend.  In  the  first 
place,  it  is  difficult  to  imagine  how  pure  economic  rent  of 
agricultural  ]and  can  be  separated  in  practice  from  the 
annual  value  of  the  separable  improvements  on  the  land. 
But  apart  from  this  difficulty,  the  appropriation  of  eco- 
nomic rent  by  the  public  without  compensation  to  the 
owners  will  probably  never  appeal  to  the  conscience  of 
the  American  public  as  a  just  thing  to  do.  No  abstract 
reasoning,  based  on  "natural  rights,"  will  persuade  a 
modern  nation  to  so  radical  a  step.  This  honestly  and 
earnestly  advocated  policy  is  only  one  more  illustration  of 


342       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

the  danger  of  basing  social  reasoning  on  any  theory  of 
"natural  rights." 

Some  advocates  of  the  "  single  tax  "  recognize  the  un- 
wisdom or  injustice  of  appropriating  all  rents  now  exist- 
ing, and  therefore  propose  to  compensate  present  holders 
of  the  land.  The  State  in  that  case  would  gain  only  the 
future  increments  in  value  which  increasing  population 
may  be  expected  to  produce. 

In  cities  it  is  easy  to  separate  the  pure  economic  rent 
from  the  earnings  of  improvements,  such  as  buildings. 
In  fact,  as  has  been  stated  elsewhere  in  these  pages, 
such  a  separation  is  frequently  made.  Moreover,  it  is  in 
cities  that  the  principal  evils  attendant  on  private  land- 
holding  are  discoverable.  Therefore  the  objections  to 
land  nationalization  do  not  in  the  same  degree  apply  to 
land  municipalization.  Many  who  will  reject  the  one  will 
favor  the  other.  Even  here,  however,  it  is  well  to  pro- 
ceed very  cautiously.  Confiscation,  at  any  rate,  should 
not  be  tolerated.  If  great  and  expensive  changes  along 
this  line  should  approve  themselves  to  the  people,  the 
burden  of  the  changes  should  be  widely  diffused  through- 
out the  community  by  means  of  inheritance  and  other 
taxes. 

Direct  and  Indirect  Taxes. — In  concluding  our  discussion 
there  remains  to  be  noted  a  distinction,  frequently  seen  in 
economic  writings,  between  direct  and  indirect  taxation. 
The  meaning  attributed  to  these  terms  at  different  times 
and  by  different  writers  has  varied  widely,  but  a  common 
definition  is  that  direct  taxes  are  taxes  laid  by  the  State 
upon  those  who  are  expected  to  bear  the  burden  of  them, 
while  indirect  taxes  are  expected  to  be  shifted  to  other 
persons.  Poll  taxes,  property  taxes,  and  inheritance 


EXPENDITURE  AND  REVENUE  343 

taxes  are  usually  called  direct,  while  customs  taxes 
and  excise  taxes  are  called  indirect.  The  importer  of 
goods  subject  to  duty  pays  the  tax,  but  recoups  himself 
from  the  enhanced  price  which  he  is  able  to  charge  the 
consumer  of  the  goods.  Close  analysis  of  the  problem  has 
led  many  writers  to  doubt  whether  the  distinction  is,  after 
all,  a  real  one,  since  in  many  cases  taxes  which  at  first 
sight  seem  to  be  direct,  prove  to  be  regularly  shifted  to 
others.  We  cannot  enter  into  a  discussion  of  this  sub- 
ject in  a  work  like  the  present ;  but  inasmuch  as  the  terms 
are  frequently  employed,  and  as  the  distinction  has  played 
an  important  part  in  American  financial  history  on  account 
of  the  use  of  the  terms  in  the  Federal  constitution,  it  is  well 
to  know  how  the  words  are  commonly  used. 

As  taxation  is  the  most  important  single  subject  in  the 
domain  of  public  finance,  we  shall  present  a  more  detailed 
treatment  in  the  following  chapter,  in  connection  with  the 
topic  Revenues  in  the  United  States. 

SUMMARY 

1.  Public  finance  treats  of  the  revenues  and  expenditures  of  govern- 

ment. 

2.  Government  business  is  everywhere  the  largest  single  business, 

and  profoundly  influences  all  private  business. 

3.  The  importance  of  government  business,  and  hence  of  public 

finance,  depends  upon  the  dominant  idea  of  the  proper  economic 
function  of  government. 

4.  Public  expenditure  in  civilized  States  has  been  rapidly  increasing, 

owing  both  to  the  rapid  increase  in  population  and  to  the 
widened  scope  of  government  activity. 

5.  Public  expenditures  are  for  fulfilling  the  protective,  the  commer- 

cial, the  developmental,  and  the  self-sustaining  functions  of 
government. 


344       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

6.  Public  revenues  are  derived  from  public  domains  and  industries, 

from  fees,  special  assessments,  and  taxes,  from  fines,  gifts,  etc., 
and  from  public  loans. 

7.  Taxes,  the  chief  source  of  revenue,  are  compulsory  payments  for 

government  expenses. 

8.  A  just  tax  is  one  which  conforms  to  the  ability  of  the  taxpayer 

to  bear  the  burden. 

9.  Land  nationalization,  a  proposed  plan  of  taking  all  the  economic 

rent  of  agricultural  laud  for  the  support  of  the  State,  is  imprac- 
ticable, and,  unless  compensation  is  provided  for,  it  is  morally 
indefensible;  land  municipalization,  the  proposal  to  take  the 
economic  rent  of  city  property,  stands  on  a  somewhat  different 
footing. 

10.   The  distinction  between  direct  and  indirect  taxes  is  neither  valid 
nor  valuable. 

QUESTIONS 

1.  What  is  public  finance?    From  what  is  it  to  be  distinguished? 

2.  What  is  the  problem  presented  by  the  method  of  storing  revenue 

in  the  United  States  ? 

3.  What  is  the  bearing  of  public  finance  upon  the  labor  problem? 

4.  What  view  of  the  economic  functions  of  government  is  held  by 

the  anarchist?    By  the  extreme  individualist?    The  socialist? 

5.  Why  have  public  expenditures  so  uniformly  increased  during  the 

last  century  ? 

6.  Classify  public  expenditures,  and  name  particular  expenditures 

falling  under  each  group. 

7.  What  classes  of  expenditure  have  shown  the  most  rapid  increase 

in  the  last  century  ? 

8.  What  are  fees?    Special  assessments?    Taxes?    What  are  the 

differences  among  them? 

9.  How  do  revenues  from  loans  differ  from  other  revenues? 

10.  What  is  the  justification  of  taxation  ?    What  are  the  theories  re- 

garding just  taxation  ? 

11.  What  is  land  nationalization  ?    Land  municipalization  ?    What  is 

the  difference  between  them  ?  Discuss  the  justice  and  practica- 
bility of  these  proposals. 


EXPENDITURE  AND  REVENUE  345 


LITERATURE 

Adams,  H.  C. :  The  Science  of  Finance,  §§  10, 18,  and  49,  and  Public 

Debts. 

Bastable,  C.  F. :  The  Public  Finance. 
Daniels,  W.  M. :    The  Elements  of  Public  Finance,  pp.  30-33  and  pp. 

36-38. 

Ely,  R.  T.,  and  Finley,  J.  H. :  Taxation  in  American  States  and  Cities. 
George,  H. :  Progress  and  Poverty. 
Plehn,  C.  C. :  Introduction  to  Public  Finance. 
Seligraan,  E.  R.  A. :  Essays  in  Taxation. 


CHAPTER   II 

REVENUES  IN  THE  UNITED  STATES 
I.   FEDERAL  REVENUES 

THE  following  table  shows  the  Federal  revenue  classified 
by  sources  for  the  fiscal  year  ending  June  30,  1903  :  — 

Customs $284,479,582 

Internal  revenue 230,810,124 

Postal  service 134,224,443 

Miscellaneous : 

Profits  on  coinage,  bullion  de- 
posits, and  assays $  8,254,740 

Fees,    consular,    letters-patent, 

and  land 4,048,833 

Sales  of  public  land 8,926,311 

Tax  on  national  banks 1,647,429 

Sale  of  Indian  lands,  etc 2,393,269 

Part  payment   Central    Pacific 

Railroad  indebtedness   ....    4,066,350 

Other  miscellaneous 15,770,036 

45,106,968 
Total  revenues $  694,621,117 

Customs  Taxes. — As  appears  in  the  table,  the  govern- 
ment derives  a  very  large  proportion  of  its  whole  revenue 
from  customs  duties,  which  are  taxes  laid  upon  imported 
commodities.  In  earlier  days,  and  particularly  before  the 
Civil  War,  the  customs  duties  constituted  nearly  the  whole 
of  the  Federal  revenues  ;  and  even  now,  in  times  of  peace, 

346 


REVENUES  IN  THE  UNITED  STATES  347 

about  one-half  of  the  ordinary  tax  receipts  of  the  national 
government  are  from  this  source. 

Customs  duties  are  either  specific  or  ad  valorem.  Spe- 
cific duties  are  duties  laid  in  proportion  to  weight  or  number, 
without  regard  to  value,  while  ad  valorem  duties  are  levied 
in  proportion  to  the  value  of  the  commodities  imported.  Ad 
valorem  duties  are  open  to  the  objection  that  they  offer  a 
greater  temptation  to  fraudulent  valuations,  and  hence 
make  more  difficult  the  work  of  the  customs  officers. 
Specific  duties,  on  the  other  hand,  while  they  can  be  more 
easily  administered,  are  open  to  the  serious  objection 
that  they  impose  a  relatively  heavier  burden  upon  less 
valuable  goods  of  any  class.  Owing  to  their  greater  ease 
of  collection,  however,  such  specific  duties  now  play  a 
larger  part  than  ever  before  in  our  tariff  system. 

Although  long  use  and  practical  convenience  have  given 
the  customs  duties  a  large  and  apparently  secure  place  in 
our  financial  system,  there  are  certain  evident  objections 
to  such  taxation  which  must  be  borne  in  mind  by  the  stu- 
dent in  considering  the  general  question  of  tax  reform. 
These  objections  call  for  a  word  of  explanation. 

Objections  to  Customs  Duties.  — 1.  Their  Regressive  Char- 
acter. —  First  of  all,  it  is  an  objection  against  such  taxes 
that  they  are  regressive  in  character.  Customs  duties,  to 
yield  a  large  revenue,  must  be  levied  upon  goods  of  very 
general  consumption,  and  moreover  fiscal  reasons  lead  to 
the  imposition  of  high  rates  upon  such  commodities.  But 
it  is  for  precisely  such  commodities  that  people  of  only 
moderate  incomes  spend  a  greater  proportion  of  their  in- 
come than  do  the  rich.  Therefore  the  tax  is  regressive  ; 
it  lays  a  disproportionate  burden  upon  poor  people  and 
people  of  moderate  means. 


348       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

2.  Effect  upon  Industry.  —  In   the  second  place,  such 
taxes,  if  they  are  "  protective  "  in  character,  interfere  with 
the  natural  disposition  of  the  nation's  labor  and  capital. 
Moreover,  it  regularly  happens  that  such  a  tariff  takes 
much  more  from  consumers  than  ever  finds  its  way  into 
the  Federal  treasury,  since  only  imported  goods  yield  a 
revenue,  while  all  goods,  imported  and  domestic,  are  sold 
at  a  higher  price  to  the  consumer. 

3.  Inelasticity.  —  The  two  objections  just  explained  are 
based  chiefly  upon  social  and  industrial  considerations. 
A  third  objection  is  directly  financial  in  its  nature.     One 
mark  of  a  good  tax  is  its  elasticity.     Now  few  taxes  are 
more  inelastic  than  customs  duties.     Frequent  changes  of 
tariff  rates  are  fatal  to  that  stability  of  industrial  condi- 
tions without  which  business  cannot  prosper.     Unusual 
demands  upon  the  Federal  purse  cannot  be  met  by  changes 
in  the  tariff  schedules. 

4.  Uncertainty.  —  And  hence  results  still  a  fourth  ob- 
jection, also  financial  in  character.     It  is  a  serious  defect 
of  such  taxes  that  they  are  likely  to  yield  least  when  gov- 
ernment need  is  greatest.     A  war,  calling  for  unusual 
expenditures,  is  certain  to  curtail  international  trade  and 
hence  revenues  from  customs  duties.    Moreover,  recurrent 
industrial   depressions  affect  most  seriously  the  govern- 
ment's receipts  from  this  source. 

As  we  have  already  said,  in  spite  of  the  serious  defects 
of  customs  duties  as  a  main  source  of  revenue,  long-estab- 
lished usage  and  the  great  fiscal  needs  of  modern  gov- 
ernment are  certain  to  maintain  a  prominent  place  for 
this  form  of  taxation  for  a  long  time  to  come.  Meantime, 
nations  usually  seek  to  compensate  for  these  objections  by 
supplementing  their  customs  duties  with  other  forms  of 
taxation. 


EEVENUES  IN  THE  UNITED  STATES  349 

Excise  Taxes.  —  One  such  form  of  taxation,  as  practised 
in  the  United  States,  is  that  of  excise  taxes,  the  revenue 
constituting  part  of  the  "  internal  revenue  "  of  the  govern- 
ment. Excise  duties  or  taxes  are  those  levied  directly  upon 
certain  classes  of  goods  produced  within  the  country.  Down 
to  the  Civil  War,  these  taxes  were  bitterly  opposed  in  the 
United  States,  and  very  little  revenue  was  derived  from 
them.  The  enormous  cost  of  the  Civil  War  required  a 
resort  to  this  form  of  taxation,  and  when  the  strain  of 
war  had  passed,  much  of  the  popular  opposition  to  excise 
taxes  was  found  to  have  disappeared,  with  the  result 
that  the  Federal  government  now  secures  from  this  source 
revenues  second  in  amount  only  to  those  from  customs 
duties. 

Method  of  Collection.  —  The  method  of  collecting  excise 
taxes  has  been  developed  into  a  simple  and  effective  sys- 
tem. Producers  of  tobacco,  cigars,  whiskey,  etc.,  must 
purchase  revenue  stamps  from  the  government  and  put 
these  upon  the  packages  containing  the  goods  in  such 
a  way  that  opening  the  packages  will  destroy  the 
stamps. 

Excise  taxes  are  regularly  classed  with  customs  duties 
as  indirect  taxes,  because,  while  they  are  laid  directly 
upon  producers,  it  is  supposed  that  they  will  be  shifted  to 
consumers  in  the  enhanced  price  of  the  commodity.  In 
some  other  respects,  too,  excise  taxes  are  open  to  the  same 
objections  that  lie  against  customs  duties.  They  are  re- 
gressive in  character,  though  as  they  are  laid  chiefly  upon 
liquors  and  tobacco,  the  injustice  of  their  regressive  char- 
acter is  less  grave.  But,  on  the  other  hand,  excise  taxes 
have  proved  very  productive,  and  they  offer  relatively 
little  difficulty  in  collection.  Moreover,  they  form  a  more 


350       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

reliable  source  of  revenue  than  do  customs  duties,  in  thai 
they  fluctuate  less  in  times  of  war  and  in  periods  of  indus- 
trial depression.  Hence  these  taxes  are  also  likely  to  form 
a  considerable  part  of  the  national  revenues  for  a  long 
time  to  come. 

Taxes  on  Transactions. — In  times  of  urgent  need,  as 
in  the  War  of  1812,  the  Civil  War,  and  the  late  war  with 
Spain,  the  Federal  government  has  imposed  taxes  upon 
various  sorts  of  transactions.  Thus  the  War  Revenue  act 
of  1898  imposed  "  stamp "  taxes  on  bank  checks,  tele- 
grams, freight  and  express  receipts,  transfers  of  stocks 
and  bonds,  bills  of  exchange,  etc.,  the  method  of  collect- 
ing the  revenue  being  similar  to  that  described  in  the  case 
of  excise  taxes. 

Though  such  taxes  may  be  made  the  source  of  large  and 
easily  collected  revenue,  they  are  not  likely  to  be  resorted 
to  except  in  times  of  emergency,  since  their  general  effect 
is  to  impede  business;  and  a  check  on  business  activity 
soon  lessens  the  revenue  from  other  sources.  In  most 
cases,  as  was  shown  by  our  recent  experience,  taxes  on 
transactions  are  borne  by  the  consumer  or  purchaser, 
though  in  some  cases,  if  the  tax  be  a  small  one,  the  pro- 
ducer or  seller  will  "pocket  the  loss." 

II.   STATE  REVENUES 

Income  taxes  and  inheritance  taxes  have  been  levied  by 
the  Federal  government,  but  as  these  taxes  have  also  been 
resorted  to  by  the  states,  we  may  defer  our  discussion  of 
them  to  a  later  page.  We  come  next  to  taxation  by  the 
commonwealths,  and  in  beginning  it  may  be  well  to  study 
the  following  table  showing  the  revenues  of  New  York 
State  for  the  fiscal  year  ending  September  30,  1902:  — 


EEVENUES  IN  THE  UNITED  STATES  351 

Direct  State  Taxes  (including  the  general  property  tax)  $6,973,663.82 
Taxes  on  corporations  and  their  organization  .  .  .  7,606,750.29 
Tax  on  transfers  (inheritances,  direct  and  collateral)  .  3,303,554.72 

Liquor  tax  (State's  share) 4,221,671.99 

Miscellaneous,  —  fees,  sales,  etc 1,555,134.61 

Total $23,660,775.43 

Poll-taxes.  —  One  antiquated  source  of  revenue  which 
does  not  appear  separately  in  the  table  is  the  poll-tax. 
Many  states  levy  poll  or  capitation  taxes,  to  be  paid  into 
the  state  or  local  treasury.  Poll-taxes  are  taxes  usually 
levied  at  a  uniform  rate  upon  practically  all  male  citizens. 
They  are  difficult  of  collection,  in  the  highest  degree 
inequitable,  and  are  gradually  disappearing  from  the 
financial  systems  of  advanced  governments. 

General  Property  Tax.  —  The  greater  part  of  the  reve- 
nue entered  in  the  table  under  the  name  Direct  State 
Taxes  is  from  a  general  property  tax,  a  tax  which  is  levied 
—  in  theory  —  upon  nearly  all  property,  real  and  personal, 
in  the  hands  of  the  people.  The  importance  of  this  tax 
appears  in  the  fact  that  revenue  derived  from  it  in  the 
commonwealths  of  the  United  States  constitutes  nearly 
three-fourths  of  the  state  and  local  revenues,  and  nearly 
one-half  of  the  total  revenues  of  the  country,  —  national, 
state,  and  local. 

And  yet  no  economist  who  has  ever  written  upon  the 
subject,  and  no  state  officer  who  has  had  to  do  with  the 
administration  of  the  tax,  has  ever  been  able  to  speak  of  it 
except  in  terms  of  the  severest  condemnation.  Naturally, 
then,  there  is  now  a  strong  tendency  to  work  away  from 
this  form  of  taxation.  Some  of  the  many  serious  faults 
which  the  general  property  tax  has  everywhere  shown  call 
for  comment  and  explanation. 


352        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Though  the  method  of  assessment  and  apportionment 
differs  in  many  details  among  the  states,  it  is  the  usual 
custom  for  assessors  in  each  community  to  prepare  com- 
plete statements  of  all  kinds  of  taxable  property  owned  by 
the  people  of  the  community.  In  some  states  the  assess- 
ors receive  from  all  residents  sworn  "  lists "  of  property 
owned  and  subject  to  tax.  By  the  terms  of  the  law,  the 
property  is  supposed  to  be  rated  at  its  true,  full  value, 
though  by  the  acknowledged  practice  of  assessors  and 
courts  of  review,  the  real  rates  vary  widely  from  state 
to  state,  and  even  from  community  to  community.  On 
the  basis  of  the  property  valuations  thus  made  the  state 
and  local  governments  —  county  and  town  —  levy  direct 
taxes  at  a  rate  fixed  from  year  to  year  according  to  the 
fiscal  needs.  The  tax  is  then  collected  by  local  officers, 
and  of  the  whole  amount  the  portion  levied  by  the  county 
and  state  is  passed  on  to  the  designated  officers  after  each 
minor  political  division  has  set  aside  its  share. 

1.  Unjust  Apportionment.  —  The  first  of  the  defects  of 
the  tax  appears  in  the  apportionment  of  the  state's  share 
of  the  tax.     Each  community  has  a  narrow,  selfish  interest 
in  reducing  its  valuation  that  it  may  escape  its  just  share 
of  the  tax.     In  this  sordid  struggle  of  community  against 
community,  assessments   are   made  to  vary  all   the   way 
from  10  to  90  per  cent  of  the  true  values.     The  same 
mean  struggle  is  especially  frequent   between  city  and 
country  districts.     To  correct  the  evil,  state   boards  of 
equalization   are   usually  appointed,  but   experience   has 
shown  that  such  boards  are  unable  to  do  much  to  lessen 
the  inequities  inherent  in  the  system. 

2.  Inequity  as  between  Realty  and  Personalty.  —  In  the 
second  place,  the  general  property  tax  has  proved  grossly 


REVENUES  IN   THE  UNITED  STATES  353 

inequitable  in  laying  an  undue  proportion  of  its  burden 
upon  real  property,  allowing  various  forms  of  personal 
property  to  escape  with  a  slight  tax  or  with  no  tax  at  all. 
A  secondary  result  of  this  inequity  is  that  the  rural  dis- 
tricts bear  a  disproportionate  burden,  since  the  greater 
part  of  the  tax-escaping  personalty  is  owned  by  the 
wealthy  citizens  of  our  cities. 

3.  Inequalities  of  City  Assessments.  —  Very  similar  to 
the  preceding  evils  is  the  further  injustice  wrought  by  the 
tax  through  the  disproportionate  assessment  of  the  pieces 
of  real  estate  in  cities.     During  recent  years  several  state 
tax  commissions  have  found  and  reported  that  in  the  case 
of  city  properties  the  proportion   between  the   assessed 
value  and  the  real  value  quite  regularly  varies  inversely 
as  the  value  of  the  property.     Thus  in  one  case  it  was 
found  that   some  of  the   most   valuable   properties  were 
assessed  at  only  about  one-tenth  of  the  real  value,  while 
properties  of  little  value  were  regularly  assessed  at  from 
five  to  six-tenths  of  their  value. 

4.  Temptation  to  Dishonesty.  — It  follows  from  the  evils 
already  described  that  the  general  property  tax  leads  to  a 
shocking  amount  of  dishonesty,  perjury,  bribery,  and  other 
forms  of  corruption.     Indeed,  as  one  writer  has  expressed 
it,  "  The  general  property  tax  has  gone  far  toward  making 
perjury  respectable  and  even  virtuous." 

Inasmuch  as  the  general  property  tax  has  been  con- 
demned by  nearly  all  students  of  finance  and  by  financial 
administrators,  we  should  all  welcome  the  present  ten- 
dency on  the  part  of  the  states  to  turn  to  other  forms  of 
taxation.  In  several  commonwealths  the  state  govern- 
ments have  entirely  or  nearly  abandoned  the  general  prop- 
erty tax,  leaving  it  chiefly  to  the  smaller  political  divisons; 

2A 


354        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

and  other  commonwealths  are  moving  in  the  same  direc- 
tion. 

Corporation  Tazes.  —  Partly  owing  to  the  proved  in- 
justice of  the  general  property  tax,  but  partly  also  owing 
to  the  recent  great  growth  of  the  corporate  form  of  busi- 
ness enterprise,  there  has  been  in  the  last  quarter  of  a 
century  a  considerable  development  along  the  line  of  taxa- 
tion of  corporations.  In  some  cases,  as  in  New  York, 
there  are  two  taxes  thus  laid,  one  upon  the  organization 
of  such  corporations,  and  another  upon  their  annual  busi- 
ness. In  some  cases,  taxes  are  laid  only  upon  special 
forms  of  corporate  business,  such  as  banking  and  railway 
companies  and  the  like,  while  in  other  cases  the  tax  is 
broadened  to  include  all  corporate  business.  It  has  been 
found  much  easier  to  reach  the  revenues  of  such  businesses 
directly  than  to  reach  them  through  the  taxation  of  the 
stocks  and  bonds  of  the  corporations  in  the  hands  of  indi- 
vidual owners.  New  York,  Pennsylvania,  Vermont,  and 
Massachusetts  are  among  the  states  that  have  come  nearest 
to  abandoning  the  general  property  tax,  and  developing 
in  its  stead  taxation  of  corporations. 

License  Taxes.  —  Another  form  of  state  taxation  that 
has  undergone  a  considerable  development  in  recent  years 
is  that  of  business  licenses.  License  taxes,  which  have  at 
rare  intervals  been  levied  by  the  Federal  government,  are 
now  exclusively  used  by  state  and  local  governments. 
When,  as  is  the  case  in  our  Southern  states,  licenses  are 
required  for  many  different  kinds  of  business,  serious  dis- 
turbance to  business  results.  But  much  may  be  said  in 
favor  of  a  system  of  taxing  by  license  a  few  industries 
which  it  is  generally  believed  the  state  should  regulate. 
The  most  important  of  such  license  taxes  are  those  laid 


REVENUES  IN  THE  UNITED  STATES  355 

on  the  sale  of  liquor.  The  state  of  New  York,  which 
divides  the  proceeds  from  liquor  licenses  between  the 
state  and  the  community,  received  $4,221,671.99  as  its 
share  of  such  revenue  in  the  fiscal  year  1902. 

Inheritance  Taxation.  —  Still  another  form  of  taxation 
to  which  increasing  resort  has  been  had  in  recent  years 
is  that  of  inheritances,  collateral  or  direct.  In  the  levy- 
ing of  inheritance  taxes,  or  "  succession  duties,"  there  are 
many  and  wide  differences  of  detail  which  we  cannot  stop 
to  consider.  In  many  cases  such  taxes  are  progressive  or 
graduated  on  a  twofold  basis.  Thus,  a  small  bequest  to 
a  wife  or  son  or  daughter  would  be  taxed  at  the  lowest 
rate,  while  the  bequest  of  a  large  fortune  to  distant  rela- 
tives or  strangers  in  blood  would  bear  the  heaviest  burden. 
This  form  of  taxation  is  winning  increasing  favor  from 
economists  and  from  statesmen,  both  on  account  of  its  con- 
formity to  the  "  faculty  "  theory  of  taxation,  and  because 
of  its  practical  ease  and  certainty  of  collection.  The 
large  part  which  the  tax  already  plays  in  the  finances 
of  New  York  State  is  shown  in  the  table.  Fifteen  com- 
monwealths, including  New  York,  Ohio,  Illinois,  Massa- 
chusetts, and  Wisconsin,  raise  a  part  of  their  revenue 
from  this  source. 

The  Income  Tax.  —  Income  taxation  calls  for  more  ex- 
tended comment.  First  of  all  we  must  point  out  the 
peculiar  situation  in  which  the  matter  of  such  taxation 
now  stands  in  our  country.  More  than  a  century  of 
experience  in  many  states  has  demonstrated  that  under 
our  form  of  government,  income  taxation  cannot  be  suc- 
cessfully practised  by  the  state  governments.  If  New 
York  State  should  levy  an  income  tax,  its  wealthy  citizens 
could  easily  escape  it  by  acquiring  a  legal  residence  in 


356        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

some  near-by  state  which  would  be  likely  to  bid  for  such 
action.  It  follows  that  the  only  practicable  plan  of  reach- 
ing incomes  is  through  taxation  by  the  Federal  govern- 
ment. 

Federal  Income  Taxation.  —  The  Federal  Constitution 
requires  that  representatives  in  Congress  and  direct  taxes 
shall  be  apportioned  among  the  states  "  according  to  their 
respective  numbers."  Under  early  decisions  of  the  United 
States  Supreme  Court,  it  had  been  held  that  direct  taxes, 
within  the  meaning  of  the  Constitution,  did  not  include 
income  taxes.  But  in  passing  upon  the  income  tax  pro- 
vision of  the  Revenue  Act  of  1894,  the  Supreme  Court, 
by  a  majority  of  one  and  after  a  change  in  the  personnel 
of  the  court  during  the  consideration  of  the  case,  reversed 
the  earlier  finding  and  held  that  income  taxation  must  be 
levied,  if  at  all,  upon  the  states  in  proportion  to  their 
population.  Under  this  ruling  it  becomes  practically 
impossible  to  find  a  place  for  the  taxation  of  incomes 
anywhere  in  our  financial  system  ;  for  the  injustice  of 
laying  a  Federal  income  tax  upon  the  basis  of  popula- 
tion becomes  apparent  at  once  when  we  recall  the  great 
per  capita  wealth  of  New  York  and  Pennsylvania  as 
compared  with  that  in  Nevada  and  some  of  our  Southern 
states. 

The  Income  Tax  in  Practice.  —  But,  it  may  be  asked,  Is 
it  not  well  that  income  taxation  has  thus  been  made  im- 
possible, at  least  until  a  possible  re-reversal  of  the  opinion 
of  our  highest  court  ?  To  answer  this  question,  we  must 
consider  the  claims  for  and  against  the  tax.  First  of  all, 
it  is  to  be  noted  that  in  England,  Italy,  Prussia,  and  other 
German  States  in  which  the  income  tax  has  been  given 
a  trial,  (1)  experience  has  justified  this  form  of  taxation, 


REVENUES  IN  THE  UNITED  STATES  357 

according  to  the  majority  opinion  of  those  who  have  con- 
sidered the  matter.  Moreover,  it  is  especially  noteworthy 
that  income  taxation  (2)  gains  in  economy  and  productive- 
ness, and  wins  increasing  approbation  as  the  years  go  by. 
This  is  in  sharp  contrast  with  the  experience  of  all  States 
in  their  use  of  the  general  property  tax,  which  has  grown 
more  unjust  and  less  workable,  the  longer  it  has  been 
tried. 

The  Income  Tax  in  Theory.  —  In  the  third  place,  (3) 
there  is  little  question  that  an  income  tax,  assuming  it  to 
be  fairly  enforceable,  conforms  almost  perfectly  to  the  ideal 
of  taxation,  that  men  should  pay  the  expenses  of  the  State 
in  proportion  to  their  "faculty  "  or  ability,  since  income 
is  by  all  means  the  best  single  mark  of  such  ability. 
Where  the  tax  is  applied  uniformly  upon  all  kinds  of 
income,  (4)  it  cannot  be  shifted  easily  if  at  all,  and  in  any 
event,  the  tax  on  rent  and  monopoly  privileges  of  all  sorts 
cannot  be  shifted.  This  itself  is  a  strong  recommenda- 
tion of  the  tax. 

Exemption.  — It  is  usual  to  exempt  small  incomes  from 
income  taxation,  for  the  reason  that  possessors  of  such  in- 
comes already  pay  a  disproportionate  share  of  other  taxes, 
and  for  the  further  very  practical  reason  that  the  expense 
of  collecting  the  tax  on  such  incomes  bears  too  high  a 
proportion  to  the  return  to  render  such  taxation  eco- 
nomical. 

Practicability.  —  The  question  of  the  possibility  of  a 
fair  enforcement  of  income  taxation  is  best  answered  by 
the  English  experience.  We  cannot  here  explain  the 
English  system  in  detail,  but  may  simply  state  that  the 
laws  there  provide  for  the  taxation  of  all  incomes  grouped 
into  five  classes,  and  that  the  tax  is  laid  in  the  greater 


358        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

number  of  cases  "at  the  source."  For  example,  dividends 
of  a  corporation  pay  the  tax  before  they  are  distributed  to 
the  individual  shareholders. 

Conclusion.  —  The  objections  commonly  urged  against 
income  taxation,  that  it  is  inquisitorial,  impracticable,  etc., 
must  be  left  to  the  study  and  discussion  of  the  class. 
Whatever  may  be  the  weight  of  such  objections,  it  remains 
a  fact  that  the  underlying  justice  of  the  tax,  coupled  with 
its  proved  practicability  in  other  countries,  is  leading  an 
increasing  body  of  Americans  to  favor  this  method  of 
securing  revenues  for  the  Federal  government,  and  making 
large  fortunes  pay  their  just  share  of  the  expenses  of 
government. 

III.    LOCAL  REVENUES 

Local  areas  of  administration  in  the  United  States  have 
usually  relied  in  the  main  upon  the  same  taxes  which  are 
levied  by  the  state  governments.  Thus,  as  has  been  ex- 
plained above,  the  general  property  tax  is  levied  at  a  rate 
which  represents  the  contribution  of  the  taxed  property 
to  town,  county,  and  state  governments.  Similarly,  the 
local  governments  are  usually  allowed  a  share  of  the  reve- 
nue from  liquor-license  taxation.  Municipalities  also  at 
times  have  their  independent  license  system  for  hucksters, 
etc.,  though  this  system  usually  has  for  its  main  purpose 
the  regulation  of  such  business. 

Revenue  from  Franchises.  —  One  form  of  revenue  which 
American  cities  have  been  too  prone  to  neglect  is  now 
receiving  increasing  attention.  Private  municipal  service 
corporations  enjoy  very  valuable  privileges  under  their 
municipal  franchises,  and  they  should  be  made  to  pay  for 
these  franchises  all  that  they  are  worth ;  that  is,  the  capi- 


REVENUES  IN   THE  UNITED  STATES  359 

talization  of  their  earning  power,  less  the  actual  capital 
invested  and  an  extra  allowance  for  the  regular  risks 
of  the  business.  Some  cities  have  been  able  to  manage 
such  municipal  enterprises  for  themselves  with  great 
profit,  and  it  is  not  improbable  that  this  method  will  be 
adopted  more  generally  as  American  municipalities  be- 
come more  honest  and  businesslike. 

For  the  sake  of  completeness,  the  following  table  of  New 
York  City's  revenues  for  the  year  1902  is  presented,  that 
the  student  may  compare  it  with  earlier  tables  showing 
the  revenues  of  a  state  and  the  nation.  The  figures  as 
given  in  the  annual  report  of  the  City  Comptroller  have 
been  rearranged  to  bring  them  within  the  classification  of 
sources  of  revenue  given  on  pages  335-336. 

Revenues  from  Public  Property : $3,940,633.05 

Rents: f  3,528,529.75 

Docks  and  slips     .     .  f2,676,040.45 

Ferry 295,885.47 

Market  stands  .  .  .  280,596.79 
City  buildings  .  .  .  137,630.70 
Others 138,376.34 

Sales: 260,036.06 

Articles  made  in  pub- 
lic institutions  .    .         77,311.27 

Virus 33,512.89 

Others 159,211.90 

Privileges      (including      "trimming 

scows,"  $92,273.92) 97,426.31 

Interest,  dividends,  and  sales    .    .    .  44,640.93 

Public  Industries,  publicly  managed : 8,890,476.77 

Water 8,889,581.22 

Sewer 895"50 


360        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Franchises: $383,942.15 

Including  those  of 

Railroads 1340,013.87 

Gas  lighting 20,058.98 

Pipe  lines 8,635.63 

Coach  Company 5,373.25 

Electric  lighting 4,480.54 

Fees: 1,110,626.73 

Fees 462,068.48 

Fees  and  fines 274,437.84 

Tolls        374,120.41 

Special  Assessments 4,993,831.87 

Taxes: 89,810,048.63 

Real  Estate 73,436,178.24 

Personalty 6,953,787.41 

Licenses  other  than  liquor     ....         382,240.25 

Including  those  for 
Street  cars    .    .    .    .     f  76,690.00 
Pawn-brokers   .    .     .         97,500.00 
Sidewalk  stands    .    .         60,150.00 

Special  Taxes : 7,337,929.05 

Banks 2,019,650.05 

Excise  (City's  share)     5,318,278.98 

Old  taxes,  with  interest 1,699,913.70 

Irregular  and  miscellaneous : 567,914.76 

Permits .'.'.         550,910.31 

Fines,  penalties,  and  costs     ....  8,479.60 

Forfeits 7,482.58 

Bequests 851.77 

Conscience  fund 190.50 

Public  loans,  —  receipts  from  sale  of  bonds    ....     110,603,951.54 

Received  from  state,  —  for  schools 1,372,395.66 

Unclassified 1,073,201.07 

Total $222,746,982.23 


REVENUES  IN  THE  UNITED  STATES  361 

IV.   A  BALANCED  REVENUE  SYSTEM 

In  what  has  gone  before,  we  have  not  dwelt  upon  the 
question  whether  any  forms  of  revenue  are  particularly 
appropriate  to  different  divisions  of  our  government,  or 
whether  there  is  any  gain  in  a  balanced  system  for  the 
different  governments  considered  together.  A  moment's 
reflection  should  convince  the  student  that  no  part  of  our 
revenue  laws  can  be  finally  judged  until  it  is  considered  in 
its  relation  to  the  whole  system.  To  emphasize  this  fact, 
it  may  be  well  to  suggest  here  a  balanced  revenue  system, 
in  which  Federal,  state,  and  local  revenues  will  be  placed 
in  the  right  relation  one  to  another. 

Federal  Revenues.  —  In  the  first  place,  it  is  to  be  noted 
that  the  Federal  Constitution  itself  prescribes  the  place  of 
customs  duties  in  the  system.  Again,  excise  taxation  could 
not  be  practised  by  the  state  governments,  since  any 
state  that  should  begin  such  a  practice  would  promptly 
drive  the  taxed  production  into  the  jurisdiction  of  other 
commonwealths.  To  these  two  natural  sources  of  Federal 
revenue  may  be  added  the  taxes  on  transactions,  though 
these  should  be  rarely  and  sparingly  levied  ;  taxation  of 
interstate  commerce,  which  would  be  a  peculiarly  appro- 
priate source  of  Federal  revenue,  and  would  offer  an  excel- 
lent opportunity  for  the  regulation  of  interstate  business; 
and  income  taxation,  which  is  now  unconstitutional,  but 
which  may  again  become  constitutional,  as  it  has  been 
before.  At  present  no  one  of  these  last  three  forms  of 
taxation  is  demanded  by  urgent  fiscal  need ;  but  it  may 
be  expected  that  when  such  need  arises,  the  government 
will  resort  to  one  or  all  of  these  sources  rather  than  in- 
crease much  further  the  present  customs  and  excise  taxes. 


362        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

Moreover,  it  may  even  be  hoped  that  there  will  in  any 
event  be  a  gradual  lessening  of  the  proportionate  depend- 
ence upon  customs  duties  and  excises,  and  an  increasing 
resort  to  interstate  commerce  and  income  taxation,  which 
are  more  equitable,  more  economical,  more  certain,  and 
more  elastic  sources  of  revenue. 

State  Taxation. — We  have  already  pointed  out  the 
manifold  inequities  of  the  general  property  tax.  There 
is  no  longer  any  question  that  it  would  be  well  for  our 
commonwealths  to  abandon  as  rapidly  as  possible  this 
source  of  revenue,  and  to  leave  to  the  local  governments 
the  taxation  of  real  property.  The  state  can  easily  de- 
velop corporation,  inheritance,  and  license  taxation  until 
they  will  prove  sufficient  for  state  needs.  Already  two 
commonwealths  have  made  the  change,  and  many  others 
seem  prepared  to  follow  them.  Under  these  forms  of  taxa- 
tion, personal  property  will  be  taxed  more  certainly  and 
more  equitably  than  it  has  anywhere  been  taxed  under 
the  general  property  tax. 

Local  Taxation. — The  system  thus  far  outlined  would 
leave  to  the  local  governments  the  most  convenient  and 
most  appropriate  sources  for  their  revenues.  First  of  all, 
public  franchises  or  municipal  management  of  public-ser- 
vice monopolies  should  be  made  in  the  United  States  as 
in  Europe  to  pay  a  considerable  part  of  the  local  expenses 
of  government.  Licenses  also  form  a  proper  source  of 
revenue  even  for  smaller  communities.  Finally,  any 
remaining  revenues  could  easily  be  supplied  from  a  little- 
burdensome  tax  on  real  estate,  with  perhaps  a  special 
and  distinct  tax  upon  such  personal  property  as  house- 
hold furniture,  live  stock,  farm  implements,  merchants' 
stocks,  etc. 


REVENUES  IN  THE  UNITED  STATES  363 

Such  a  harmonious  system  as  has  been  here  suggested 
would  insure  a  greater  degree  of  equity,  elasticity,  econ- 
omy, certainty,  and  harmony  than  now  obtain  in  our  un- 
systematic hit-and-miss  forms  of  taxation. 

SUMMARY 

1.  The  revenues  of  the  Federal  government  are  derived  in  great 

part  from  customs  duties  and  excise  taxes;  other  sources  are 
taxes  on  transactions,  postal  receipts,  etc. 

2.  Customs  duties  are  regressive,  inelastic,  and  uncertain,  and  disturb 

business;  but  their  productiveness  gives  them  a  strong  place 
in  the  financial  system. 

3.  Excise  taxes  on  liquor  and  tobacco  are  also  regressive,  but  they 

are  less  objectionable  in  other  respects,  and  they  are  conven- 
iently collected. 

4.  States  have  relied  in  the  past  mainly  on  the  general  property  tax, 

which  is  unwieldy,  unscientific,  and  inequitable,  and  leads  to 
many  sorts  of  corruption. 

5.  Poll-taxes  no  longer  play  any  considerable  role  in  taxation. 

6.  Taxes  on  corporations,  license  taxes,  and  inheritance  taxes  are 

in  many  states  taking  the  place  of  other  forms  of  taxation. 

7.  The  income  tax,  which  has  been  proved  to  be  practicable,  and 

which  is  theoretically  a  very  just  form  of  taxation,  cannot  at 
present  be  successfully  laid  in  the  United  States. 

8.  Local  governments  now  rely  mainly  on  the  general  property  tax 

and  license  taxation. 

9.  A  balanced  revenue  system  would  have  the  Federal  government 

supported  chiefly  by  taxation  of  incomes  and  interstate  com- 
merce and  by  customs  and  excise  taxes ;  the  state  governments, 
by  corporation  and  inheritance  and  license  taxes;  the  local 
government,  by  franchise  and  license  taxation,  supplemented 
if  necessary  by  small  separate  taxes  on  real  property  and  some 
classes  of  tangible  personal  property. 

QUESTIONS 

1.    What  part  of  the  Federal  revenues  comes  from  customs  duties? 
From  excise  taxes  ? 


364       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

2.  What  are  specific  duties?    Ad  valorem  duties  ? 

3.  State  and  explain  the  objections  to  customs  duties ;  to  excise 

taxes.     Compare  the  two. 

4.  Describe  the  method  of  collecting  excise  taxes. 

5.  What  is  the  objection  against  taxing  transactions? 

6.  Describe  the  evils  of  the  general  property  tax.     How  is  the  gen- 

eral property  tax  levied  ? 

7.  What  has  caused  the  recent  great  development  of  corporation 

taxation  ? 

8.  What  are  the  advantages  of  inheritance  taxation? 

9.  Discuss  the  advantages  of  income  taxation ;  the  disadvantages. 
10.    Frame  a  balanced  system  of  taxation  for  town,  state,  and  nation, 

and  explain  why  each  tax  is  placed  where  it  is. 

LITERATURE 

Adams,  H.  C. :  The  Science  of  Finance,  Part  II,  Bk.  II,  Ch.  VI,  espe- 
cially §  73. 

Daniels,  W.  M. :  The  Elements  of  Public  Finance,  pp.  167-170  and 
pp.  186-191. 

Plehn,  C.  C. :  Introduction  to  Public  Finance,  Part  II,  Ch.  VIII,  §  1. 
See  also  other  references  at  close  of  preceding  chapter. 


APPENDIX  I 


SUBJECTS  FOR  ESSAYS,  DISCUSSIONS,  AND 
DEBATES 

THE  following  list  is  intended  simply  to  be  suggestive. 
Students  are  advised  first  of  all  to  choose  such  subjects  for 
study  as  are  best  suited  to  the  local  environment.  Thus, 
if  the  student  lives  in  a  rural  district,  let  him  first  study 
local  land  values,  agricultural  rent,  farming  methods  and 
their  changes,  mortgage  indebtedness,  the  size  of  farms, 
the  business  character  of  farmers,  the  use  of  machinery, 
transportation  of  produce,  farmers'  organizations,  etc.,  all 
with  reference  to  his  own  neighborhood.  If  he  lives  in 
a  manufacturing  town,  let  him  study  in  the  same  way  the 
factory  problem,  —  the  extent  to  which  women  and  chil- 
dren are  employed,  wages  and  hours  of  labor,  means  of 
preventing  or  adjusting  clashes  between  employers  and 
employed,  etc.;  or  let  him  investigate  the  local  railway 
problem,  —  freight  rates,  safety  precautions,  accidents, 
etc. 

It  hardly  needs  to  be  said  that  in  selecting  subjects  for 
debate  from  the  following  list,  care  should  be  exercised  to 
choose  only  such  topics  as  offer  a  real  affirmative  and 
negative,  and  to  frame  the  question  in  such  a  way  as  to 
have  the  two  sides  well  balanced. 

365 


366       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

BIOGRAPHICAL  AND  PERSONAL 
(Especially  for  Essays) 

Sketch  of  the  Life  of  Adam  Smith. 

The  Life  Work  of  Robert  Owen. 

Benjamin  Franklin  as  a  Practical  Economist 

Arnold  Toynbee. 

Karl  Marx  and  his  Theories. 

Henry  George  and  the  Single  Tax. 

LABOR  AND  LABOR  ORGANIZATIONS 

Economic  Causes  for  the  Rise  and  Fall  of  Slavery  in  the 

United  States. 

Economic  Bearings  of  Free  Land  in  the  United  States. 
Indentured  Servitude  in  the  American  Colonies. 
The  Sweating  System  in  our  Great  Cities. 
The  Value  and  Cost  of  Child  Labor. 
Convict  Labor. 

The  Economy  of  High  Wages. 
Sunday  Labor. 

The  History  and  Prospects  of  Profit-sharing. 
Voluntary  Cooperation  in  the  United  States. 
Workingmen's  Budgets. 
Old  Age  Pensions. 

Labor  Organizations  in  the  United  States. 
Incorporation  of  Trade-unions. 
Compulsory  Incorporation  of  Trade-unions. 
The  American  Federation  of  Labor. 
Compulsory  Arbitration  in  New  Zealand. 
Factory  Legislation  in  the  United  State*. 
Strikes. 

The  National  Consumers'  League. 
Trade-union  Labels. 
The  National  Civic  Federation. 


APPENDIX  I  867 

Chinese  Labor  and  the  American  Standard  of  Life. 
The  Power  of  Consumers  over  Conditions  of  Employment. 
Combinations  of  Employers  and  Employees  against  the  Public 
Government  by  Injunction. 

LAND  AND  FOOD  SUPPLY 

Agricultural  Eents  in  England  during  the  Nineteenth  Century. 

Extensive  and  Intensive  Farming  in  the  United  States. 

The  Relation  between  Small  Farms  and  Democracy. 

Forest  Culture  in  New  York  State. 

What  Has  Been  Done  with  our  Public  Domain  ? 

The  Possibilities  of  Irrigation  in  our  Arid  States. 

How  Great  Cities  are  Fed. 

MONEY,  BANKS,  AND  BANKING 

Money  in  Various  Climes  and  Times. 

The  Demonetization  of  Silver  in  the  United  States. 

National  and  International  Bimetallism. 

Fiat  Money  in  an  Ideal  State. 

The  English  and  American  Banking  Systems. 

Our  National  Banking  System. 

Postal  Savings  Banks. 

A  Visit  to  the  New  York  Clearing-house. 

Credit  in  Modern  Industry. 

Usury  and  Usury  Laws. 

The  Proposed  Branch  Banking  System  in  the  United  States. 

The  Law  of  March  14, 1900. 

Assets  Currency. 

COMMERCE,   MONOPOLIES,  ETC. 
The  Advance  and  Decline  of  American  Shipping. 
Ship  Subsidies. 

The  Stock  Market  and  its  Kelation  to  Industry. 
Economic  Crises. 


368        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Monopolies,  Old  and  New. 

Trusts,  What  They  Are  and  What  They  Do. 

Municipal  Lighting. 

The  Social  Economy  and  Waste  of  Advertising. 

TRANSPORTATION 

The  Farmer's  Interest  in  Good  Roads. 

The  Prussian  Railway  System. 

Railway  Combinations  in  the  United  States. 

The  Interstate  Commerce  Commission  and  its  Powers. 

River  and  Harbor  Bills. 

How  Railway  Rates  Should  Be  Determined. 

SOCIAL  PROBLEMS 

The  Influence  of  Luxury  upon  Rich  and  Poor. 

How  a  Day-laborer  with  a  Family  of  Five  Exists  in  the  Stu« 

dent's  Community. 
Tenement-house  Life  in  Large  Cities. 
Working-girls'  Clubs. 

The  Economic  and  Moral  Causes  of  Poverty. 
The  Charity  that  Pauperizes. 
Immigration  and  Social  Standards. 
Child  Labor. 

TAXATION  AND  THE  TARIFF 

Adam  Smith  on  Taxation. 

Income  Tax  Decisions  of  the  United  States  Supreme  Court. 

Taxes  that  Can  Be  Shifted. 

Taxation  and  Perjury. 

The  Internal  Revenue  System. 

The  English  Corn  Laws. 

The  Protective  Tariff  on  Sugar. 

The  Taxation  of  Inheritances. 

Reciprocity  and  Reciprocity  Treaties. 


APPENDIX  I  369 

Does  the  Protective  Tariff  Benefit  American  Labor? 
John  Stuart  Mill  on  the  Taxation  of  Land  Values. 


THE  STATE  IN  INDUSTRY 

Four  Views  of  the  Economic  Functions  of  Government :  An- 
archism, Extreme  Individualism,  Moderate  Individualism, 
Socialism. 

The  Kelation  of  the  State  to  Industry  in  the  United  States. 

Fiscal  Monopolies  in  France. 

The  South  Carolina  Dispensary  Law. 

The  Telegraph  in  England  and  America. 

National  Workshops  in  France  in  1848. 

Our  Subtreasury  System. 

Ideal  Commonwealths. 

Christian  Socialism. 

The  Fabian  Socialists. 

Socialistic  Experiments  in  the  United  States. 

The  Social  Democratic  Party  in  Germany. 

Are  We  Tending  toward  Socialism? 

Socialism  or  Social  Reform,  Which  Shall  It  Be? 

Socialism  vs.  Imperialism. 

The  Brotherhood  of  Labor. 

Liberty  of  the  Press  in  the  Socialistic  State. 

GENERAL  THEORY 

The  Theory  of  Value  in  Marshall  and  Bohm-Bawerk. 
The  Malthusian  Theory  of  Population. 
The  Theory  of  a  Wage-fund. 

The  "Lump  of  Labor"  Theory,  or  the  Theory  of  a  Work-fund 
Money  and  the  Balance  of  Trade :  An  Exploded  Theory. 
A  Study  of  Human  Wants. 
Possible  Substitutes  for  Competition. 
Interesting  Cases  of  Conjunctural  Gains. 
2n 


370       ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

What  are  Economic  Laws  ? 

The  Influence  of  Climate  upon  Civilization. 

The  Quantity  Theory  of  the  Value  of  Money. 

MISCELLANEOUS 

The  Economic  Kesults  of  the  Great  Plague  of  1348. 

The  Irish  Famine  of  1848. 

What  Bad  Cooking  Is,  and  What  It  Costs. 

What  Our  Community  Has  to  Pay  for  Intoxicants. 

The  Economic  Functions  of  the  Church. 

Changes  of  Fashion  in  Women's  Clothing. 

A  Study  in  Division  of  Labor.  (To  be  drawn  from  the  stu- 
dent's observation.) 

Our  National  Ash-heap.  (The  cost  to  the  nation  of  inflam- 
mable construction  of  building.) 

An  Expensive  Luxury.  (A  careful  statistical  study  of  the  cost 
of  tobacco  to  individuals  and  nations.) 

The  Cost  of  War.  (A  comparative  study  of  the  items  in  vari- 
ous national  budgets  that  are  due  to  wars  past  or  to  prepa- 
ration for  future  wars.) 


APPENDIX  II 


COUESES  OF  READING 

IT  is  believed  that  both  students  and  teachers  may 
derive  valuable  aid  from  the  following  selected  bibliogra- 
phies. The  first  group  in  each  case  includes  works  of  a 
relatively  untechnical  character,  and  therefore  constitutes 
a  sort  of  elementary,  "  minimum  "  course  of  special  study 
of  the  particular  topic.  The  books  mentioned  in  the 
second  group  are  in  each  case  more  advanced  and  tech- 
nical, and  may  therefore  be  used  either  for  advanced 
courses  of  study  or  as  works  of  reference.  The  authors 
would  suggest  that  a  school  desiring  to  form  a  standard 
working  library  in  Economics  would  do  well  to  purchase 
the  books  mentioned  in  the  second  groups  in  the  order  in 
which  they  are  named. 

GENERAL  ECONOMICS 
GROUP  1 

Blackmar,  F.  W. :  Economics. 

Bullock,  C.  J. :  An  Introduction  to  the  Study  of  Economics- 

Devine,  E.  T. :  Economics. 

Gide,  Charles :   Principles  of  Political  Economy.    (American 

adaptation,  1904.) 

Seager,  Henry  E. :  Introduction  to  Economics. 
Walker,  F.  A. :  Elementary  Course  in  Political  Economy;  also 

Briefer  Course  in  Political  Economy. 
371 


372       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

GROUP  2 

Smith,  Adam  :  Wealth  of  Nations  (in  Ashley's  Economic  Clas- 
sics). 

Marshall,  A. :  Principles  of  Economics. 

Smart,  W. :  Introduction  to  the  Theory  of  Value. 

Clark,  J.  B. :   The  Distribution  of  Wealth. 

Mill,  J.  S. :   TJie  Principles  of  Political  Economy. 

Bicardo,  D. :  Principles  of  Political  Economy  and  Taxation. 
(Six  chapters  in  Ashley's  Economic  Classics.) 

Walker,  F.  A. :  Political  Economy.     (Advanced  Course.) 

Patten,  S.  N. :   The  Premises  of  Political  Economy. 

Hobson,  J.  A. :   The  Economics  of  Distribution. 

Commons,  J.  E,. :   The  Distribution  of  Wealth. 

Smart,  W. :   The  Distribution  of  Income. 

ECONOMIC  HISTORY 
GROUP  1 

Ashley,  W.  J. :  Introduction  to  English  Economic  History  and 

Theory.     2  vols. 

Cheyney,  E.  P. :  Industrial  and  Social  History  of  England. 
Beard,  C. :   The  Industrial  Revolution. 
Ely,  R.  T. :  Evolution  of  Industrial  Society. 
Coman,  Katharine :   The  Industrial  History  of  the  United  States, 
Hewins,  W.  A.  S. :  English  Trade  and  Finance. 
Price,  L.  L. :  History  of  English  Commerce  and  Industry. 
Warner,  T. :  Landmarks  of  English  Industrial  History. 

GROUP  2 

Biicher,  Carl :  Industrial  Evolution.     (Translation.) 
Hobson,  J.  A. :   The  Evolution  of  Modern  Capitalism. 
Toynbee,  Arnold  :   The  Industrial  Revolution. 
Wright,  C.  D. :  Industrial  Evolution  of  the  United  States. 
Wells,  D.  A. :  Recent  Economic  Changes. 


APPENDIX  II  373 

Rand,  B. :  Selections  illustrating  Economic  History  since  1768. 

Gibbins,  H.  de  B. :  Industry  in  England. 

Cunningham,  W. :  Growth  of  English  Industry  and  Commerce. 

2  vols. 
Rogers,  J.  E.  T. :  Six  Centuries  of  Work  and  Wages  and  A 

History  of  Agriculture  and  Prices  in  England. 
Ingram,  J.  K. :  History  of  Slavery. 


THE  HISTORY  OF  POLITICAL  ECONOMY 

GROUP  1 
Price,  L.  L. :  A  Short  History  of  Political  Economy  in  England. 

GROUP  2 

Ingram,  J.  K. :  History  of  Political  Economy. 

Ashley,  W.  J.  (editor) :  Economic  Classics,  including  selected 
passages  from  Adam  Smith's  Wealth  of  Nations;  six  chap- 
ters of  Ricardo's  Principles  of  Political  Economy;  selected 
passages  from  Malthus's  Theory  of  Population;  Mun's 
England's  Treasure  by  Foreign  Trade;  Jones's  Peasant 
Rents;  and  Schmoller's  The  Mercantile  System. 

RENT,  LAND  NATIONALIZATION,  AND  THE  SINGLE  TAX 

GROUP  1 

George,  Henry :  Progress  and  Poverty. 
Walker,  F.  A. :  Land  and  its  Rent. 

GROUP  2 

Commons,  J.  R. :   The  Distribution  of  Wealth. 
Clark,  J.  B. :   The  Distribution  of  Wealth. 
Hobson,  J.  A. :  The  Economics  of  Distribution 
Patten,  S.  N. :  Dynamic  Economics. 
Smart,  W. :   The  Distribution  of  Income. 


374        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

MONEY,   CREDIT,   AND   BANKING 
GROUP  1 

Bagehot,  W. :  Lombard  Street. 

Bolles,  A.  S. :  Money,  Banking,  and  Finance. 

Jevons,  W.  S. :  Money  and  the  Mechanism  of  Exchange, 

Kinley,  D. :  Money  —  A  Study  of  the  Theory  of  the  Medium  of 

Exchange. 

Walker,  F.  A. :  Money,  Trade,  and  Industry. 
White,  Horace  :  Money  and  Banking. 

GROUP  2 

Report   of    the   Monetary    Commission   of    the   Indianapolis 

Convention. 

Scott,  W.  A. :  Money  and  Banking. 
Laughlin,  J.  L. :   The  Principles  of  Money,  and  The  History  of 

Bimetallism  in  the  United  States. 
D unbar,  C.  F. :   Theory  and  History  of  Banking. 
Nicholson,  J.  S. :  Money  and  Monetary  Problems. 
Fisk,  A.  K. :  Tlie  Modern  Bank. 
Cannon,  J.  G. :  Clearing  Houses. 
Conant,  C.  A.:  History  of  Modern  Banks  of  Issue. 
Sumner,  W.  G. :  History  of  American  Currency. 
Muhleman,  M.  L. :  Monetary  Systems  of  the  World. 
Knox,  J.  J. :   United  States  Notes. 
Walker,  F.  A. :  International  Bimetallism. 
Willis,  H.  P. :  History  of  the  Latin  Monetary  Union. 

PUBLIC  FINANCE 
GROUP  1 

Daniels,  W.  M. :  Elements  of  Public  Finance. 
Plehn,  C.  C. :  Introduction  to  Public  Finance. 


APPENDIX  II  375 

GROUP  2 

Adams,  H.  C. :   The  Science  of  Finance. 
Colin,  G. :  The  Science  of  Finance.     (Translation.) 
Bastable,  C.  F. :  Public  Finance. 
Seligrnan,  E.  E.  A. :  Essays  in  Taxation. 
Dewey,  D.  E. :  Financial  History  of  the  United  States. 
Noy  es,  A.  T>. :  Thirty  Tears  of  American  Finance. 
Ely,  E.  T.,  and  Finley,  J.  H. :  Taxation  in  American  States 

and  Cities. 

Taussig,  F.  W. :   The  Tariff  History  of  the  United  States. 
Kinley,  D. :   Tfie  Independent  Treasury. 
West,  Max :   TJie  Inheritance  Tax. 
Howe,  F.  C. :   Taxation  and  Taxes  in  the  United  States  under 

the  Internal  Revenue  System,  1791-1895. 
Kinsman,  D. :  The  Income  Tax  in  the  Commonwealths  of  the 

United  States. 

INTERNATIONAL  TRADE  AND  PROTECTIONISM 
GROUP  1 

Bastable,  C.  F. :   TJieory  of  International  Trade. 

Bastiat,  F. :  Sophisms  of  Protection. 

Clare,  G. :  Money  Market  Primer. 

Ely,  E.  T. :  Problems  of  To-day. 

Taussig,  F.  W. :  Tariff  History  of  the  United  States. 

GROUP  2 

Sumner,  W.  G. :  Protectionism. 

Patten,  S.  N. :   The  Economic  Basis  of  Protection. 

Wells,  D.  A. :  Practical  Economics. 

List,  F. :  National  System  of  Political  Economy. 

Carey,  H.  C. :  Harmony  of  Interests. 

Ashley,  W.  J. :  The  Tariff  Problem. 


376       ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

SOCIALISM 
GROUP  1 

Bellamy,  E. :  Looking  Backward. 

Brooks,  J.  G. :   The  Social  Unrest. 

Ely,  R.  T. :  Socialism  and  Social  Reform. 

Gronlund,  L. :   The  Cooperative  Commonwealth. 

Howells,  W.  D. :  A  Traveller  from  Altruria. 

Morley,  H.  (editor) :  Ideal  Commonwealths. 

Reeves,  W.  P. :  State  Experiments  in  Australia  and  New  Zea 

land. 

GROUP  2 

Kirkup,  T. :  History  of  Socialism. 
Marx,  Karl :  Capital.     (Translation.) 
Rae,  J. :  Contemporary  Socialism. 

Schaffle,  A.  E.  F. :   TJie  Quintessence  of  Socialism.     (Transla- 
tion.) 

Vandervelde,  E. :  Collectivism.     (Translation.) 
Woolsey,  T.  D. :  Communism  and  Socialism. 

LABOK:    ITS  POSITION,   ITS  CONDITIONS,   AND  ITS 
EARNINGS 

GROUP  1 

Ely,  R.  T. :   The  Labor  Movement  in  America. 
Gladden,  W. :   Working  People  and  their  Employers. 
Mitchell,  J. :   Organized  Labor. 

Toynbee,  Arnold :   The  Industrial  Revolution  in  England 
Wright,  C.  D. :  Industrial  Evolution  of  the  United  States. 

GROUP  2 

Report  of  the  United  States  Industrial  Commission. 
Annual  and  Special  Reports  of  the  United  States  Labor  Bureau. 
Hobson,  J.  A. :  Tlie  Evolution  of  Modern  Capitalism. 
Schloss,  D.  F. :  Methods  of  Industrial  Remuneration. 


APPENDIX  II  377 

Jevons,  W.  S. :  The  State  in  its  Relation  to  Labor. 
Stimson,  F.  J. :  Handbook  to  the  Labor  Law  of  the  United  States, 
Lowell,  Josephine  S. :  Industrial  Arbitration  and  Conciliation. 
Webb,  Sidney  and  Beatrice  (Potter) :  History  of  Trade-union- 
ism and  Industrial  Democracy. 

Potter,  Beatrice :   The  Cooperative  Movement  in  Great  Britain. 
Levasseur,  E. :  The  American  Workman.     (Translation.) 
Gilman,  N".  P. :  Profit-sharing. 
Ashley,  W.  J. :   The  Adjustment  of  Wages. 
Rogers,  J.  E.  T. :  Six  Centuries  of  Work  and  Wages. 
Brassey,  T. :   Work  and  Wages. 


MONOPOLIES  AND  INDUSTRIAL  COMBINATIONS 
GROUP  1 

Ely,  R.  T. :  Monopolies  and  Trusts. 

Gunton,   G. :   Trusts  and  the  Public. 

Jenks,  J.  W. :  The  Trust  Problem. 

Lloyd,  Henry  D. :    Wealth  against  Commonwealth. 

Von  Halle,  E. :   Trusts  and  Industrial  Combinations. 

Meade,  E.  S. :  Trust  Finance. 

GROUP  2 

Report  of  the  United  States  Industrial  Commission,  Vols.  I 

and  II. 

Adams,  H.  C. :   The  Relation  of  the  State  to  Industrial  Action. 
Bemis,  E.  W. :  Municipal  Monopolies. 
Clark,  J.  B. :   Theory  of  Economic  Progress. 
Farrer,  T.  H. :   The  State  in  its  Relation  to  Trade. 
Cook,  W.  W. :  The  Corporation  Problem. 
Bridge,  J.  H.  (editor) :  The  Trust,  its  Book. 
Bridge,  J.  H. :  Inside  History  of  the  Carnegie  Steel  Co. 
Baker,  C.  E. :   Trusts  and  the  People. 


378        ELEMENTARY  PRINCIPLES  OF  ECONOMICS 

Dodd,  S.  C.  T. :  Combinations :  their  Uses  and  Abuses.  (A  eulogy 
of  the  Standard  Oil  Company  by  one  of  its  attorneys)  ;  also 

An  Inside  View  of  Trusts,  circulated  free  of  charge  in  the  in- 
terests of  the  Standard  Oil  Company. 

TEANSPORTATION 

GROUP  1 

Hadley,  A.  T. :  Eailroad  Transportation. 
Johnson,  E.  R. :  American  Railway  Transportation. 

GROUP  2 

Reports  (Annual)  of  the  Interstate  Commerce  Commission. 

Report  of  the  United  States  Industrial  Commission. 

Meyer,  B.  H. :  Railway  Legislation  in  the  United  States. 

Stickney,  A.  B. :   The  Railway  Problem. 

Dixon,  F.  H. :  State  Railroad  Control. 

Jeans,  J.  S. :  Waterways  and  Water  Transport. 

Johnson,  E.  R. :  Inland  Waterways. 

Lewis,  G.  H. :  National  Consolidation  of  Railways. 

Newcomb,  H.  T. :  Railway  Economics. 

CORPORATIONS  AND  CORPORATION  FINANCE 
GROUP  1 

Cleveland,  F.  A. :  Funds  and  their  Uses. 

Meade,  E.  S. :   Trust  Finance. 

Pratt,  S.  A. :  The  Work  of  Wall  Street. 

GROUP  2 

Report  of  the  Chicago  Conference  on  Trusts. 
Burdick,  F.  M. :  The  Essentials  of  Business  Law. 
Greene,  T.  L. :  Corporation  Finance. 
Cook,  W.  W. :   The  Corporation  Problem. 

Emery,  H.  C. :  Speculation  on  the  Stock  and  Produce  Exchanges 
of  the  United  States. 


APPENDIX  II  379 

COMMERCIAL  GEOGRAPHY 
GROUP  1 

Adams,  C.  C.:  A  Text-book  of  Commercial  Geography. 
Redway,  J.  W. :  New  Basis  of  Geography. 
Trotter,  Spencer :  The  Geography  of  Commerce. 

GROUP  2 

Reports  of  the  Department  of  Commerce  ana  Labor  (U.S.), 
especially  Commercial  Relations  of  the  United  States; 
Consular  Reports ;  Monthly  Summary  of  Commerce  and 
Finance. 

Twelfth  Census  of  the  United  States. 

Chisholm,  G.  G. :  A  Handbook  of  Commercial  Geography. 

Keltic,  J.  S. :  Applied  Geography. 

In  addition  to  the  books  mentioned  in  the  preceding  para- 
graphs, students  will  find  certain  general  works  of  reference  of 
very  great  value.  These  may  be  most  conveniently  listed  under 
the  names  dictionaries,  periodicals,  and  general  treatises. 
Every  school  that  aspires  to  the  possession  of  a  working 
library  in  our  subject  should  have  a  considerable  number  of  the 
books  in  the  following  list,  together  with  some  of  the  maga- 
zines of  most  general  use  in  the  subject.  In  the  first  two 
groups  the  books  and  magazines  respectively  are  given  in  the 
order  in  which  the  authors  would  recommend  their  purchase. 
For  obvious  reasons  it  has  not  been  deemed  best  to  do  this  in 
the  case  of  the  books  mentioned  in  Group  Three,  which  are 
therefore  given  in  the  alphabetical  order  of  their  authors.  The 
student  will  not  find  in  this  book  any  references  to  German, 
French,  or  Italian  authorities  that  have  not  been  translated. 
Should  he  have  occasion,  in  exceptional  cases,  to  refer  to  such 
works,  he  should  consult  the  bibliographies  that  are  to  be 
found  in  many  of  the  general  treatises  included  in  our  list 


380        ELEMENTARY  PRINCIPLES   OF  ECONOMICS 

DICTIONARIES 

Dictionary  of  Political  Economy.     Edited  by  R.  H.  Inglis  Pai- 

grave. 
Cyclopedia  of  Political  Science  and  Political  Economy.    Edited 

by  J.  J,  Lalor. 
Cyclopedia  of  Social  Keform.     Edited  by  W.  D.  P.  Bliss. 

The  standard  encyclopedias  will  also  be  found  to  contain 
special  articles  on  very  many  economic  topics. 

PERIODICALS 

Publications  of  the  American  Economic  Association. 

The  Quarterly  Journal  of  Economics. 

Political  Science  Quarterly. 

The  Yale  Review. 

The,  Journal  of  Political  Economy. 

Annals  of  the  American  Academy  of  Political  and  Social  Science. 

Municipal  Affairs. 

Commercial  and  Financial  Chronicle. 

Bradstreet's. 

Dun's  Review. 

The  Bankers'  Magazine.     (American.) 

GENERAL  TREATISES 

Andrews,  E.  B. :  Institutes  of  Economics. 

Bullock,  C.  J. :  Introduction  to  the  Study  of  Economics. 

Devine,  E.  T. :  Economics. 

Cannan,  E. :  Elementary  Political  Economy. 

Ely,  R.  T. :  Outlines  of  Economics;  also  Introduction  to  Politi 

col  Economy.     (Revised  Edition,  1901.) 
Davenport,  H.  J. :  Elementary  Economics. 
Gide,  C. :  Principles  of  Political  Economy-     (Translation.) 
Hadley,  A.  T, :  Economics. 


APPENDIX  II  381 

Hearn,  W.  E. :  Plutology. 

Marshall,  A.:  Principles  of  Economics;  also  Marshall,  A.  and 

E. :  The  Economics  of  Industry. 
Nicholson,  J.  S. :  Principles  of  Political  Economy. 
Roscher,  W. :  Political  Economy.     (Translation.) 
Seager,  H.  R. :  Introduction  to  Economics. 
Sidgwick,  H. :  Principles  of  Political  Economy. 
Walker,  F.  A. :  Political  Economy.     (Advanced  Course.) 


INDEX 


Abstinence  theory  of  interest,  292. 

Act  of  1873,  209. 

Act  of  March  14, 1900,  213. 

Adams,  H.  C.,  on  public  debts,  337. 

Agricultural  stage,  21, 31-34;  culmina- 
tion in  feudalism,  39. 

Agriculture  in  England  in  1760,  49. 

American  Federation  of  Labor,  274. 

Anarchism,  322. 

Arbitration,  industrial,  285;  compul- 
sory, 286. 

Austrian  theory  of  interest,  294. 

Balance  of  trade,  232;  old  theory  of , 

236. 

Banking,  47,  218,  221-223 ;  origin  of,  47. 
Banks,  definition,  47,  222;  number  of, 

222 ;  functions  of,  222. 
Barter,  disadvantages  of,  37,  195. 
Barter  economy,  stage  of,  21. 
Bequests,  taxation  of,  355. 
Bills  of  exchange,  219. 
Bimetallism,  definition,  208 ;  national, 

210;  international,  211. 
Bland- Allison  Act,  211. 
Boehm-Bawerk    theory    of    interest, 

294. 

Bonds  not  capital,  116,  137. 
Brotherhood ,  development  of,  48. 


Cannibalism,  origin  of,  27 ;  end  of,  30. 

Capital,  defined,  134,  290;  a  factor  of 
production,  134;  fixed  and  circulat- 
ing, 138;  free  and  specialized,  138; 
origin  of,  136 ;  function  of,  135 ;  re- 
sults of  use,  137 ;  interest  on,  290. 

Census,  estimates  of  wealth,  116-117 ; 
on  localization  of  industry,  152. 

Centralization  in  business,  71. 

383 


Child  labor,  62,  287. 

Christian  socialists,  324. 

Cities,  origin  of,  38. 

Civilization,  material,  defined,  20. 

Civil  service,  importance  for  govern- 
ment ownership  and  control,  191. 

Classes,  alienation  of,  43. 

Clearing-houses,  223 ;  transactions  of, 
224. 

Climate,  influence  on  goodness  of 
land,  254-256. 

Coal,  production  revolutionized,  56. 

Coins  and  coinage,  198-199. 

Collectivism,  defined,  323. 

Combinations  of  workmen,  law  of,  58, 
63. 

Commerce,  origin  of,  36. 

Communism,  defined,  323. 

Competition,  among  employers,  69; 
among  monopolies,  76 ;  increase  of, 
172 ;  wastes  of,  317. 

Concentration  of  industry,  71. 

Conciliation,  industrial,  285. 

Constitutionality  of  income  taxation, 
356. 

Consumption,  defined,  84;  analysis  of, 
99-101 ;  luxurious,  106 ;  harmful,  108; 
place  of,  in  economics,  80;  produc- 
tive and  final,  84;  the  law  of  de- 
mand, 97-99;  relation  to  production, 
85. 

lontract.  14-15. 

ioBtractinn  of  currency,  203-206. 

Cooperation,  defined,  283;  in  Minne- 
apolis, 284;  advantages  and  weak- 
nesses, 284-285 ;  two  kinds  of,  284. 

Copyright,  14,  178. 

iorporations,  145. 
Cost  of  production,  169. 


384 


INDEX 


Cotton,  changes  in  manufacture  of, 
56. 

Credit,  defined,  218;  instruments  of, 
218-220;  institutions  of,  221-224;  ad- 
vantages of,  224-226;  evils,  226-227 ; 
public  loans,  337. 

Credit  economy,  stage  of,  21. 

Crises,  227 ;  explanation  of,  59,  118. 

Cultivation,  extensive  and  intensive 
margins  of,  261. 

Custom,  influence  of,  on  value,  172. 

Customs  taxes,  346.    (See  also  Tariff.) 

Diminishing  returns,  law  of,  125-129, 
261. 

Distribution,  defined,  246;  place  in 
economics,  246;  relation  to  laws, 
248 ;  processes  of,  248. 

Division  of  labor,  147-151 ;  advantages, 
150;  disadvantages,  150-151;  illus- 
trated, 148-149. 

Division  of  occupations,  36,  146. 

Domains,  public,  revenues  from,  336. 

Drafts,  219. 

Duties.     (See  Protectionism.) 

Economic  condition  of  England  in 
1760,  49-53. 

Economic  importance,  how  deter- 
mined, 96. 

Economic  legislation,  hi  England 
before  1760, 51 ;  changes  in,  57 ;  for 
inspection  of  goods,  60 ;  for  protec- 
tion of  labor,  61. 

Economic  life,  2. 

Economic  order  of  consumption,  95. 

Economic  unit,  2. 

Economics,  defined,  2,  3 ;  divisions  of, 
5-7 ;  relation  to  the  social  sciences,  1. 

Economy  defined,  2. 

Education,  economic  importance  of, 
272 ;  public  expenditure  for,  333. 

Eminent  domain,  12. 

Engel,  law  of  consumption,  101. 

England,  Industrial  Revolution  in, 
49-65 ;  public  expenditure  in,  330 ; 
income  taxation  in,  359. 

Entrepreneur,  function  of,  143 ;  re- 
ward of,  302. 


Escheats,  a  source  of  public  revenue, 

336. 

Evolution,  nature  of,  69. 
Exchange,  5 ;  origin  of,  31 ;  advantages 

of,  162-163 ;  organization  of,  163. 
Excise.    (See  Taxes.) 
Expenditure,  public,  329-335  ;  increase 

of,  330;  objects  of,  334;  in  the  U.S., 

334. 
Exports  and  imports,  234. 

Fabian  socialists,  323. 

Factors  of  production,  123. 

Factory  Acts,  62. 

Fees,  337. 

Feudalism,  39. 

Fines,  a  source  of  public  revenue,  336. 

Fishing  tribes,  28. 

Fluctuation  in  trade,  after  the  Indus- 
trial Revolution,  59. 

Food,  consumption  of,  101. 

Foreign  exchange,  230-236.  (See  also 
International  trade.) 

Fractional  currency,  207. 

France,  public  expenditure  in,  329. 

Franchises,  not  capital,  137 ;  proper 
policy  regarding,  76,  187,  191,  358, 
362. 

Fraser,  James,  on  the  duty  of  social 
service,  319. 

Free  coinage,  199. 

Free  lands,  influence  on  labor  in  the 
U.S.  69,  241 ;  influence  on  rent,  258. 

Free  trade,  239-242. 

Freedom,  personal,  15 ;  political,  39. 

Future  goods,  relation  to  interest,  295. 

George,  Henry,  on  land  taxation,  340. 

Germany,  demonetization  of  silver  in, 
209. 

Giddings,  Franklin  H.,  on  non-com- 
peting groups,  272. 

Gifts,  a  source  of  public  revenue,  336. 

Gilds,  45 ;  origin  of,  38,  39 ;  industrial 
organization  of,  273. 

Gluts,  relation  to  crises,  59,  118. 

Gold,  advantages  for  use  as  money,  196. 

Goods,  definition  of,  81;  classes  of, 
81-S4 ;  representative,  137. 


INDEX 


385 


Government,  relation  to  money,  199 
relation  to  monopoly,  76,  186,  321 
relation  to  capital  formation,  298 
functions  of,  329. 

Government  paper  money,  203,  206. 

Great  Britain.     (See  England.) 

Greenbacks,  or  U.S.  notes,  203. 

Gresham's  Law,  205,  211. 

Handicraft  stage,  21,  35-39. 
Harmful  consumption,  108. 
History,  value  of,  for  economic  study 

5,  19. 
Housekeeping,  economic   importance 

of,  110;  wastes  in,  111. 
Hunting  and  fishing  stage,  21,  26-28. 
Hunting  tribes,  27. 

Illinois,  consumption  in,  100. 

Immigration  and  population,  132, 133. 

Imports,  234. 

Income,  247. 

Income  tax,  355-358 ;  relation  to  Fed- 
eral constitution,  356;  theory  of ,  357. 

Increasing  returns,  170. 

Independent  economy,  stage  of,  21. 

Independent  treasury,  328. 

Industrial  revolution,  in  England,  49- 
65;  in  the  U.S.,  67-73;  results  of, 
58,  59. 

Industrial  stage,  21, 42-78 ;  three  phases 
of,  42. 

Industry,  government  management  of, 
78,  186,  321 ;  government  regulation 
of,  77,  191 ;  revenue  from,  336. 

Inflation,  203-206. 

Inheritances,  taxation  of,  355. 

Inspection  of  goods,  in  England,  60; 
in  the  U.S.,  75. 

Insurance,  an  element  in  gross  inter- 
est, 298 ;  in  gross  profits,  303. 

Integration  of  industry,  71. 

Interest,  290-299 ;  how  determined, 
296-297 ;  excessive,  299 ;  theories  of, 
291-296. 

Internal  revenue,  349. 

International  banking,  231. 

International  payments,  how  effected, 
232-234. 

2c 


International  trade,  230-243;  nature 
of,  230-236 ;  rate  of  exchange  in,  232 ; 
balance  of  trade,  232;  value  in,  234; 
advantages  of,  235;  restrictions  on! 
236-243. 

Invention,  and  the  Industrial  Revolu- 
tion, 54-56. 

Investment,  104 ;  of  labor  and  capital 
on  land,  125-129 ;  258-261. 

Iron,  production  of,  in  England,  51,  56. 

Jevons,  on  government  management 
of  monopolies,  190. 

Knights  of  Labor,  274. 

Labor,  defined,  129;  a  factor  in  produc- 
tion, 129-134;  causes  of  efficiency 
of,  130;  division  of,  147-149;  hours 
of,  62,  130,  287;  Knights  of,  274;  of 
women  and  children,  62,  287;  or- 
ganization of,  145-151;  supply  of, 
129. 

Labor  legislation,  51,  57,  62,  74,  287. 

Labor  organizations,  defined,  273;  edu- 
cational value  of,  277;  growth  of, 
275 ;  temperance  in,  277 ;  weaknesses 
of,  278-280;  origin,  273-275;  two 
types  of,  274. 

Laissez-faire,  53. 

Land,  a  factor  in  production,  123 ;  free, 
influence  of,  69,  241,  258;  three  ser- 
vices of,  124;  organization  of,  152- 
154;  relation  to  rent,  252;  quality 
of,  253;  location  of ,  256-262 ;  nation- 
alization of,  340. 

Large-scale  production,  156-157;  con- 
trasted with  small-scale  production, 
157-158. 

Latin  Monetary  Union,  209. 

Law  of  consumption,  Engel's,  101. 

Law  of  demand,  99. 

law  of  diminishing  returns,  125-129. 

Law  of  diminishing  utility,  89. 
Laws,  regulating  labor,  61,  57,  68,  61, 
62,  74,  287 ;  regulating  monopolies, 
76-78. 
Legal  tender,  196,  200. 

.iberty,  personal,  15, 16. 


386 


INDEX 


Loans,  kinds  of,  297;  interest  on,  296. 
Loans,  public,  a  source  of  revenue,  337. 
Localization  of  industry,  152. 
Lockouts,  275. 
Luxury,  107. 

Macadam,  road  improvement,  56. 

Malthus,  theory  of  population,  131. 

Management  of  industries  by  the  state, 
78,  186,  321. 

Manufacture,  changes  in,  54-56 ;  hand, 
50;  in  England  in  1760,  50;  power, 
43;  relation  to  cities,  59. 

Manufacturer,  becomes  a  workman, 
44;  change  of  meaning  of  the  word, 
50. 

Marginal  utility,  89. 

Mark,  moral  code  of,  34. 

Market  value,  168-171. 

Marriage,  and  population,  131,  268. 

Marx,  Karl,  evolutionary  socialist,  324. 

Massachusetts,  consumption  in,  100; 
labor  legislation  in,  74,  287. 

Metals,  as  money,  196. 

Migrations,  in  the  pastoral  stage,  30. 

Monetary  conferences,  214. 

Money,  origin  of,  37,  38;  defined,  194, 
196;  functions  of,  194-195;  marginal 
utility  of,  90 ;  qualities  desirable  in, 
196-198;  coinage  of,  198;  value  of, 
200;  paper,  202;  fluctuations  in 
amount  of,  207;  fractional  cur- 
rency, 207;  inadequacy  of,  217; 
government  and,  299. 

Money  economy,  stage  of,  21. 

Monopolies,  natural,  73,  180;  regula- 
tion of,  76-78, 186 ;  ownership  of,  78, 
187-191,  321;  in  U.S.,  76-78;  defini- 
tions, 177-178 ;  dangers  of,  187-189 ; 
taxation  of,  184;  Jevons's  criteria, 
190. 

Monopoly  price,  181-186. 

Monopoly  profits,  304,  307. 

Moral  restraints,  48. 

Mortality  and  population,  133. 

Mortgages,  not  capital,  116, 137. 

National  Civic  Federation,  286. 
National  Consumers'  League,  276. 


National  debts,  337. 

National  economy,  stage  of,  21. 

Nationalization  of  land,  340. 

Natural  rights,  9,  16,  239. 

Natural  treasures,  319. 

Nature,  a  factor  of  production,  123. 

(See  Land.) 
New  Zealand,  compulsory  arbitration 

in,  286. 

Non-competing  groups  of  laborers,  272. 
Notes,  not  capital,  137 ;  defined,  219. 

Organization,  of  exchange,  163;  of 
production,  141-159;  of  the  factors 
as  a  group,  141-145 ;  of  labor ;  145- 
151;  of  capital,  151;  of  land,  152; 
conditions  determining,  155. 

Over-production,  general,  impossible, 
118. 

Paper  money,  203 ;  safety  of,  206. 

Partnership,  144. 

Passive  policy  of  government,  16;  re- 
action against,  60. 

Pastoral  stage,  21,  28-31. 

Patents,  14,  178. 

Patrons  of  Husbandry,  77. 

Pensions,  331. 

Personal  services,  120. 

Piece-work,  281. 

Political  freedom,  39. 

Population,  checks  to,  131 ;  growth  of, 
131-133. 

Post-office,  a  natural  monopoly,  180, 
188. 

Precious  metals.    (See  Money.) 

Price,  definition  of,  166;  how  deter- 
mined, 167 ;  monopoly,  181-186 ;  re- 
lation to  rent,  263. 

Private  enterprise,  proper  limits  of, 
15,  321. 

Privileges,  guaranteed,  13,  14. 

Production,  definition  of,  113,  115; 
place  of,  in  economics,  113;  varie- 
ties, 114;  fluctuations  in,  118;  and 
sacrifice,  119 ;  of  goods  and  services, 
120;  factors  of,  123;  organization 
of,  141-159;  large-scale  and  small- 
scale  compared,  156-159. 


INDEX 


387 


Productive  factors,  123;  organization 
of,  141-159. 

Productivity  theory  of  interest,  292. 

Profit,  definition  of,  302;  gross,  302; 
pure,  305-307;  monopoly,  304,  307; 
capitalization  of,  308. 

Profit-sharing,  282. 

Property,  private,  justification  of,  10 ; 
limitations,  11,  12-13;  nature  of, 
9;  origin  of,  10;  strengthening  of, 
11;  among  pastoral  peoples,  30; 
influence  on  distribution,  248. 

Protection  of  labor,  62,  74,  287. 

Protectionism,  237-243. 

Prussia,  analysisof  consumption  in,  100. 

Public  credit,  a  source  of  revenue,  337. 

Public  debts,  increase  of,  337. 

Public  expenditure,  329-335;  magni- 
tude of,  329-331 ;  classes  of,  331-335 ; 
objects  of,  in  U.S.,  334. 

Public  finance,  327-363;  defined,  327. 

Public  industries,  revenue  from,  336. 

Public  lands,  336. 

Public  revenues,  335-343;  in  the  U.S., 
346-360 ;  of  the  Federal  government, 
346-350;  of  the  commonwealths, 
350-358 ;  local,  358-360. 

Purchasing  power,  97. 

Regulation  of  industry,  77,  191. 

Regulation  of  monopoly.  (See  Mo- 
nopoly.) 

Rent,  a  return  to  natural  agents,  252 ; 
definition  of,  253, 264, 265 ;  intensive 
cultivation,  260;  of  agricultural 
land,  258-261;  of  urban  land,  261- 
263 ;  relation  to  value,  263. 

Replacement  of  capital,  303. 

Representative  goods,  137. 

Requisition,  12. 

Returns,  diminishing,  proportionate, 
and  increasing,  170.  (See  also  Law 
of  Diminishing  Returns.) 

Revenue  tax,  internal,  349. 

Revenue,  public.  (See  Public  rev- 
enue.) 

Revolution,  nature  of,  69. 

Rights,  not  natural,  9,  16,  239;  funda- 
mental, 9-17. 


Risk,  relation  to  interest,  298;  rela- 
tion to  profit,  303. 
Russia,  saints'  days  in,  3. 

Saving,  and  consumption,  103-106; 
inducements  to,  292-296 ;  by  hoard- 
ing, 104 ;  by  investment,  104. 

Scarcity,  relation  to  value,  166;  dif- 
ferent causes  of,  168. 

Science  of  economics,  defined,  3. 

Seigniorage,  199. 

Settlements,  Statute  of,  52. 

Sherman  Act,  212. 

Silver,  as  money,  208 ;  coinage  in  the 
U.S.,  199. 

Silver  legislation  in  the  U.S.,  209,  211, 
212,  213. 

Simple  associated  effort,  146. 

Situation  of  land,  256. 

Slavery,  origin  of,  32 ;  disappearance 
of,  39 ;  and  distribution,  248. 

Sliding-scale,  282. 

Smith,  Adam,  use  of  term  manufac- 
turer, 50;  on  industrial  freedom, 
53;  relations  with  Watt,  54;  on 
labor  laws,  57 ;  on  causes  of  differ- 
ences in  wages,  272. 

Social  sciences,  1. 

Socialism,  definition,  313;  elements 
of,  314;  claim  for  distributive  jus- 
tice, 315;  an  extension  of  existing 
institutions,  315;  strength  of,  317; 
weakness  of,  320 ;  classes  of,  323-324. 

Socialist  parties,  324. 

Special  assessments,  338. 

Specific  and  ad  valorem  duties,  347. 

Stages  in  the  development  of  economic 
life,  20-78. 

Standard  of  life,  133,  268 ;  definition 
of,  133;  and  population,  132-133. 

State  activity,  16,  65. 

State  management  of  industry,  78, 
186,  321 ;  efficiency  of,  188 ;  expense 
of,  188;  safety  of,  189. 

State  regulation  of  industry.  (See 
Industry.) 

State  regulation  of  competition  in  the 
U.S.,  74-77. 

Steam  engine,  invention  of,  54. 


388 


INDEX 


Stock  companies,  145. 
Strikes,  275. 
Sub-treasury,  328. 

Supply,  limit  of,  168 ;  of  labor,  129, 168 ; 
of  capital,  198 ;  of  money,  201,  206. 

Tariff,  discussion  of,  237-243. 

Tax,  customs,  346;  excise,  349;  on 
transactions,  350 ;  poll,  351 ;  general 
property,  351;  personal  property, 
352;  on  corporations,  354;  on  li- 
censes, 354  ;  income,  355 ;  inherit- 
ance, 355  ;  on  interstate  commerce, 
361. 

Taxation,  theory  of ,  339;  adjustment 
of,  339 ;  graduated,  340  ;  progressive, 
340;  proportional,  340;  regressive, 
340 ;  on  land  values,  340-342 ;  direct 
and  indirect,  342. 

Telford,  road  improvement,  56. 

Territorial  division  of  labor,  152. 

Thought,  condition  of,  in  1760,  53. 

Time  wages,  281. 

Town  economy,  stage  of,  21. 

Trade,  fluctuations  in,  59. 

Trade-marks,  14,  178. 

Trade-union  labels,  276. 

Trade-unions.  (See  Labor  organiza- 
tions.) 

Trades,  origin  of,  35,  36;  and  com- 
merce, 35-36. 

Transfers  of  goods.     (See  Exchange.) 

Transportation,  early,  47 ;  in  1760,  in 
England,  51,  56:  improvements  in, 
56. 

Treasury  notes,  203. 

Under-consumption,  118-119. 
Unearned  increment,  115,  342. 


United  States,  economic  history  of, 
67-79. 

Utilities,  80-85. 

Utility,  definition  of,  81 ;  varieties  of, 
83;  marginal,  87-89;  the  law  of  di- 
minishing, 87-89;  relation  to  value, 
166. 

Value,  definitions  of,  165,  166;  sub- 
jective and  objective,  166;  deter- 
mined by  marginal  utility,  166 ;  limit 
of  supply  and,  168-171 ;  cost  of  pro- 
duction and,  168-170 ;  frictional  ele- 
ments, 171-175 ;  of  by-products,  174 ; 
monopoly,  181-186. 

Wages,  267-273;  general,  267-271 ;  rel- 
ative, 271-273. 

Wages  system,  origin  of,  45. 

Wants,  relation  to  economics,  80. 

War,  expense  of,  332. 

Wastes,  economic,  110. 

Watt,  James,  invents  the  steam  en- 
gine, 54. 

Wealth  of  Nations,  50,  53,  54,  57,  272. 

Wealth,  definition  of,  82 ;  consumption 
of,  84;  individual  and  social,  116; 
census  estimates  of,  116-117. 

Well-being,  economic,  247. 

West  Shore  Railway,  lease  of,  to  N.Y. 
Central,  77. 

White,  A.  D.,  on  modern  commercial- 
ism, 321. 

Whitney,  Eli,  invention  of  cotton 
gin,  55. 

Women,  labor  of,  287;  protected  by 
Factory  Acts,  62 

Woollen  industry,  revolution  in,  65. 

World  economy,  stage  of,  21. 


A    000  040  267    7 


